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 prices initially dipped then flipped on a report that the UAE and Saudi Arabia had reached a compromise to raise oil production. When the headline broke, the market initially took it as bearish because there was a knee-jerk reaction to think that more production would mean lower prices Yet after the initial dip, the market then rallied back as it was clear that the details reported surrounding the compromise was quite bullish.
The reported details of the deal said that the UAE would be allowed to raise their base production number of 3.65 million barrels a day starting in April of 22. Yet what that means is that any additional oil over and above the agreed-upon production increase that was made at the last OPEC meeting of 40,000 barrels a day, wouldn’t even happen until long after the peak demand season ended. Not only that, the reported compromise included a provision that would extend OPEC Plus cooperation until the end of 2022, if not longer. In other words, the deal would not have any impact on oil production until the end of this year other than the previously agreed upon OPEC-Plus increase.
So the bullish oil traders should have lived happily ever after until the UAE came out in denied that any deal had been reached! So with that, the so-called compromise compromised oil prices took a turn for the worst, selling off dramatically. The possibility of the deal falling apart raises concerns about another all-out oil production war. As we have said all along, an all out production war is a very remote possibility. Yet the market becomes very emotional when it comes to these deals, especially with the August options expiring today.
It probably didn’t help that the Energy Information Administration (EIA) had to delay their weekly Petroleum Status Report because of an error in their numbers. The delay by the EIA had the oil market conspiracy theories running rampant. Was the EIA trying to cover the fact that US oil supplies are falling at a dangerous pace? Well if they were, they were not doing a very good job. If you look at the headline crude number, it fell down 7.9 million barrels. That is an incredible draw. That makes eight weeks of falling supply. That means draws and the supplies in the United States are falling at a record-breaking pace. That puts U.S. commercial crude stockpiles back to pre-pandemic low levels since January of 2020.
Some traders latched on to a big drop in U.S. gasoline demand from the record pace the week before That thought is that somehow gasoline prices hit a level where demand destruction had started to creep in. Yet the drop in gasoline demand, post-holiday, should have been expected. We usually see a drop off in demand after the peak of the holiday. Readers of The Energy Report were not surprised because we told you that this was going to happen.
John Kemp at Reuters reported that, ”The EIA Gasoline supplied data reverted to 9.28 million b/d last week, down from a record 10.0 million b/d the week before, as deliveries from the primary petroleum system into the wholesale and retail distribution network normalized after the independence day holiday. The volume of gasoline supplied is trending higher as more of the economy re-opens. In the most recent four weeks, the volume was down by less than -1.5% compared with the pre-epidemic levels.
The EIA reported the gasoline inventories increased by 1,000,000 barrels a day but are still 1% below the five-year average for this time of year. Distillate fuels surprisingly had a build by a more than expected 3.7 million barrels last week. Seasonally, we expect to see those inventories build but it was still kind of a shock .Yet even with the increase, we are seeing the supplies of distillate 4% below the five-year average.
The EIA did report an increase in domestic oil production hitting 11.4 million barrels a day that is still down 10.3 % from the 12.167 million barrels a day that was being produced July 10th of 2020.
There are reports that more people are investing in the US shale industry but will only do so if the shale companies continue to pay down debt and not increase wells. The shale producers learned that you can’t lose money on every barrel and try to make up for it in volume and re-strength is the new mantra of the US shale industry. Of course, it’s easier to be more restrained when you can’t get drilling permits and you are concerned about the regulatory environment for drilling new wells and the possibility that the pipeline you’re going to need to move that oil is going to be shut down.
In other words, there was nothing yesterday that happened that was bearish. What we saw was nervous trading and a market correction based on technicals. We could see a further correction but we don’t think the correction will be that hard unless there’s a change in the fundamentals. Right now we’re seeing the crude oil market tighten and even with the proposed increase by Saudi Arabia and the UAE, the odds are that we will not see production rise fast enough to keep up with the demand. Of course there are the other OPEC children wanting to raise production as well.
The crude oil market had more on its mind yesterday and got rattled after reports came out that said Iraq was asked to change their baseline production number because UAE what’s going to change theirs. So it’s kind of like children. If you give the UAE a cookie then the Iraqis want one too. That little drama now raises concern that the OPEC plus group will have a harder time approving this compromised, compromise.
Oil prices today have very, very strong support around 7080 which is near the lower Bolinger band. We believe if oil gets to that level, it should be very strong support and we should start looking for a bottom in that area.
Oh, before I forget, there was also a lot of news surrounding Iran reports that the Biden administration lifted some restrictions on frozen Iranian funds allowing Iran to pay off some debts but not access the money back. It was assumed by some to be a sign that the Biden administration is trying to do give more candy to the Iranians to try to bring them back to the negotiating table. Tass reported that, ”No grounds for pessimism on future of Iran nuclear deal, assure Russian envoy. All participants of the talks are indicating that they positively evaluate the work that had already been accomplished and agree that it should be continued, Russian Permanent Representative to International Organizations in Vienna Mikhail Ulyanov noted.” Go tell that to Secretary of State Anthony Blinken who is pessimistic about the possibility of a deal. Sure, the Russians want a deal because it will improve the strength of their die hard ally Iran but the rest of the world is not falling for the Iranian nuclear weapon dog and pony show. Iran’s actions speak louder than words and not allowing weapons inspectors to look at the important site suggests that the Iranians have something to hide.
Natural gas has been solid. The possibility of hot and dry temperatures engulfing the nation next week could have a major impact on this market. We get the EIA injection report and are expecting an increase of 50 BCF into storage.
The heatwave that is coming could also have major ramifications for global food prices as US crops could suffer if these forecasts for hot and dry materialize. The crop that has already had a rough start due to drought scattered rains, is compromised and could get more compromised if we get into high heat high-pressure dome with little rain. Soybeans and corn have been reacting to these forecasts and even though we’re seeing some pretty good rains right now, the possibility of hot and dry could start sending the grains back up to their previous highs.
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