Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Oil price got into the price slashing mode in one of the biggest black Friday collapses since OPEC declared a production war on U.S. producers Thanksgiving 2014. The market went into free fall mode as it was unclear that OPEC, or mainly Saudi Arabia, has the gumption to stand up to President Donald Trump and raise oil production. The market also must wonder if the Fed has the gumption to stand up to President Trump after he tweeted “So great that oil prices are falling (thank you President ). Add that, which is like a big Tax Cut, to our other good Economic news. Inflation down, are you listening Fed?”
Well, we know that the Saudis are afraid of the all-powerful Presidential tweet. Instead of shock and awe with a major cut, the Saudis are going to try to finesse the market with a big cut that does not feel like a big cut. Dow Jones reported that the Saudis, and OPEC are considering ‘clandestine’ oil output cuts, announcing an extension of current cuts and quotas from 2016 into 2019. The Saudis and OPEC would just over comply and work to erase the fears of the so-called glut. They hope that will keep the President from tweeting and cut supply before the President figures it out. “It will be still a big cut but less pronounced,” a senior Saudi oil advisor said. So, in other words while they signaled to the market a 1.4 million barrels a day cut the actual cut may be bigger, but we just will have to figure it out as we go.
Yet, if OPEC keeps it a secret, the market may punish them because it will appear that they don’t have the will to cut back. Bloomberg News says that the G20 may be where the actual amount of a production cut will be decided. “ Khalid Al-Falih and Alexander Novak, the Saudi and Russian energy ministers, are also scheduled to travel to Buenos Aires together with their principles, according to people familiar with their plans, asking not to be named because their agendas haven’t been disclosed yet. Their presence reinforces the impression that Saudi Arabia and Russia will try to reach a deal ahead of the OPEC meeting a few days later. It wouldn’t be the first time the two energy superpowers used a G20 to decide on oil policy.
Oil is still feeling pressure from the Fed as well. The path of rising interest rates is hurting the price of oil. If the Fed takes its cue from President Trump and fails to raise rates, then the dollar would fall, and oil would rise again. Are you listening Fed? Are you listening Mr. President?
Shale Producers are also wondering if President Trump is listening. The crash in oil prices means that the shale producers will have to cut back next year. According to the Wall Street Journal, his remarks have frustrated some in America’s oil patch, who say further drops in prices could take a toll on them and hurt the Trump administration’s stated goal of “energy dominance.”
“The American oil and gas producers have shown that our economy doesn’t have to rely as much on foreign sources of oil anymore, but the country needs to realize that higher prices are a part of that equation,” said Kirk Edwards, president of MacLondon Energy, an independent producer in West Texas. “We need a $60 or $70 crude price in order for the business to stay healthy.”
The Journal says that “Few industry participants were willing to discuss the president’s remarks publicly, but people at several of the largest U.S. shale producers privately expressed unhappiness. One such executive said Mr. Trump’s tweet Wednesday had frustrated company leaders.”
China trade war discussions also matter. Soft China’s data is raising fears of a major slowdown and a big drop in oil demand. President Donald Trump and Chinese President Xi Jinping will meet at the Nov. 30-Dec. 1 G-20 Summit in Buenos Aires. Any sign that some type of deal will be made will cause oil to reverse a lot of its recent drop in price. The fall is more about fears of oversupply than any real glut of oil.
The trading funds believe that OPEC is powerless to stop the drop. Reuters says that managed short positions in front-month WTI crude futures, which would profit from further price declines, have surged from record lows in July to the highest number of short positions since October 2017.
We look for the craziness to end. U.S. crude inventories should fall by 3 million barrels this week and products by 2 million barrels a piece. Refiners must ramp up to make up for the distillate shortage.
Natural gas is pulling back on the hopes the early winter cold snap will see a thaw. EWB analytics says that since last Wednesday morning, the rolling 15-day weather forecast has steadily shed degree days, with the largest losses coming on Sunday. This decline is due to a brief, four-day period of warmer-than-normal weather slated to start next Friday. This warming is expected to be transitory—and to be followed by an extended period of colder-than normal weather lasting until mid-December. The natural gas market has already lost ground, though, and is likely to lose even more on Monday. Total electricity demand should moderate this week as expected reductions in heating-driven power consumption outweigh the impact of a full work week. Day-ahead power prices are likely to remain elevated in much of the Northeast.
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