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
Fake news, price caps and hyping seasonal slowdowns in oil demand. They are pulling all the stops out to get oil prices down before the likely winter shortages.
Oil prices plunged after the Wall Street Journal reported that, “Saudi Arabia and other OPEC oil producers are discussing an output increase, the group’s delegates said, a move that could help heal a rift with the Biden administration and keep energy flowing amid new attempts to blunt Russia’s oil industry over the Ukraine war. An increase of up to 500,000 barrels a day is now under discussion for OPEC+’s Dec. 4 meeting, delegates said.” That is ahead of the EU’s embargo of Russian oil. Yet the problem is that whoever those delegates were, they were not speaking for the OPEC cartel. Oil prices hit key technical support near 7527 reversed after Saudi Oil Minister Abdulaziz bin Salman Al Saud not only denied the story but “categorically denied” that OPEC was even considering that size of a production increase, or any increase at all for that matter.
The Saudi oil minister said, “It is well known, and no secret, that OPEC+ does not discuss any decisions ahead of its meetings. The current cut of 2 million barrels per day by OPEC+ continues until the end of 2023 and if there is a need to take further measures by reducing production to balance supply and demand, we always remain ready to intervene,” he said. Not only did Saudi Arabia deny the report other OPEC members did as well. The latest member was Iraq who said overnight that there were no discussions about a production increase and the UAE denied it yesterday. The question becomes who leaked this story.
Initially, it was thought that perhaps Saudi Arabia was going to raise production. That’s sort of a quid pro quo with the Biden administration after the Biden administration went along with precedent and shielded Crown Prince bin Salman and Saudi Arabia from lawsuits granting him diplomatic immunity from lawsuits surround the murder of Jamal Khashoggi. Still some are suggesting that where there’s smoke there’s fire. Perhaps OPEC let out a trial balloon to see how the market would react if indeed the cartel decided to raise output. As you can see yesterday, it didn’t act very well. There are others that are suggesting that the story was leaked in a desperate attempt to get prices lower.
Even though the market seems well supplied in the short term because of record releases from the Strategic Petroleum Reserve and panic buying of distillate supply, we’ve drained the bullpen of global inventory. So much so that the tanks and refining capacity are running on empty.
The other issue of course is going to be the EU embargo of Russian oil and their silly price cap plan that is doomed to fail. Already Russia is saying that they will not sell any oil under the price cap mechanism. You show me a price cap and I will show you a shortage. Reuters reported that, “Russia will not ship oil or oil products to countries imposing a price cap on its oil exports and may also cut crude production, Deputy Prime Minister Alexander Novak said on Monday. He reiterated that Russia remained a reliable oil supplier and that the introduction of a price cap on Russian oil would trigger a lower supply.
There’s a lot of talk about slowing demand. The reality is that demand is much stronger than people think. It’s best to be cautious to think the drop we’ve seen recently in gasoline demand is going to stick especially when the projections are for this Thanksgiving holiday to be pretty much back to pre-pandemic levels. Global concerns about demand are still high because of increasing cases of COVID in China. At the same time we’re still seeing signs that the Chinese economy is going to continue on a path to reopening. Reuters reported that Beijing shut parks, shopping malls and museums on Tuesday and more Chinese cities resumed mass COVID testing. The Chinese capital on Monday warned that it is facing its most severe challenge of the pandemic and tightened rules for entering the city.
It’s probably a good thing demand is so bad because here in the US, the supplies of distillates are at a 70-year low. US strategic oil stockpiles are at the lowest level since 1984 and the International Energy Agency said last week that world oil supply rose 410 kb/d in October to 101.7 mb/d but is forecast to fall by 1 mb/d for the remainder of the year as OPEC+ cuts and an EU ban on Russian crude come into effect. Annual growth of 4.6 mb/d this year is set to boost global production to 99.9 mb/d. Modest gains of just 740 kb/d in 2023 will push supply to 100.7 mb/d.
The bottom line is that despite the recent sell-off in oil, the fundamentals are still decidedly bullish. The price sell-off in oil is very seasonal. Yes, I have pointed out before if you look back in history we’ve seen these price drops in oil in the month of November usually around the US Thanksgiving Day holiday. It seems like it happens every year but the other thing that happens quite frequently is that after the November correction we set the low price for the year I think it’s very probable that once we get through this sell off, the market will find a solid bottom soon and we could have significant upside as we head into the end of the year.
Natural gas has a huge surge in cold weather and we’re seeing some profit-taking today. The market may have got a bit ahead of itself. In Europe they are preparing for shortage even though storage is full. Bloomberg News reports that, “the European Union’s executive is designing an emergency natural gas price cap in an effort to avoid the kind of record highs seen in August without risking the security of supplies to the region. The European Commission is due to discuss the final shape of its so-called market correction mechanism at a meeting on Tuesday in Strasbourg. In a regulation to be proposed to member states, it plans to say that price spikes involve tangible damages and risks for customers, suppliers, and security of supply in gas and electricity markets, according to a draft seen by Bloomberg News.
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