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
The Saudis go it alone strategy to cut oil production by 1.0 million barrels of oil a day is being tested by the speculators who latched on to reports of Saudi whining about their OPEC plus partners. There are reports saying the Saudis are ‘fed up’ with OPEC partners that continue to fail to meet their output goals but more importantly reports that the Saudis are demanding ‘more transparency’ from Russia regarding their oil production. That is raising questions as to whether or not the Saudis will maintain the OPEC cut that they are mainly carrying on their back. That is raising speculation that the successful partnership between Saudi Arabia and Russia could be fraying and it might only be a matter of time until the Saudis reverse course and take back their voluntary cut. Yet the Saudis had to make good on their threat to oil speculators to make them hurt as Saudi Energy Minister Prince Abdulaziz bin Salman says oil speculators are the main reason for the disconnect between fundamentals and market investment.
On the surface, the cut should be a bullish event. OPEC+ agreed to extend the group’s existing supply cuts of 3.66 million bpd into 2024 and unless demand plummets, that should cause a supply shortfall. The International Energy Agency warned that the Saudi’s cut will exasperate a tight supply situation and cause higher prices. Dr. Fatih Birol, Executive Director of the International Energy Agency, warned that there was an imbalance in the global oil market in the second half of this year already, and that the situation would worsen after the latest OPEC+ decision to reduce oil output.
Yet the market is dismissing the looming supply deficit as it is betting on a global economic slowdown. John Kemp at Reuters wrote, “the promised unilateral production cut of -1 million b/d in July has had a limited impact on the physical oil market so far. The dated Brent spread between July and August traded in a backwardation of 17 cents per barrel on June 5 up from 10 cents on May 31. The spread from August to September traded in a backwardation of 42 cents up from 32 cents. The cuts may have arrested a further weakening of the spreads. But physical traders are not yet anticipating any shortage of crude.
That could change. Traders are diminishing the prospect of a supply deficit and instead preparing for a potential shortage. The traders will live hand to mouth betting on a softening of the global economic outlook. Yet the Saudis showed confidence in their outlook for demand by increasing its official selling price (OSP) for its flagship grade Arab Light for Asia by $0.45 per barrel to a premium of $3.00 over the Oman/Dubai average, off which Middle East crude for Asia is priced.
Bloomberg reports in regard the price hike that, “Some Asian refiners are considering buying more crude from Russia and Africa after Saudi Arabia surprised the market by raising prices for its oil following an unexpected pledge to reduce output.” Bloomberg says that, “At least three Asian refiners are considering asking for less contracted crude from Saudi Arabia in July, and may tap the spot market for cheaper cargoes, according to people familiar with the companies’ trading strategies. Barrels could also be sourced from the Persian Gulf, the US or Brazil, they said.”
Oil is also getting hit on whisper numbers that could suggest a surprise crude oil supply increase. It was reported that the US released 1.8 million barrels from the SPR and talk those exports of oil weakened because of the Memorial Day holiday. If correct then the worries of the coming supply deficit will be pushed back, at least until the big drawdown that more than likely will come next week.
Gasoline demand will be watched as reports that demand fell over Memorial Day. Yet some who measure gasoline demand by credit card swipes might not be getting the whole picture. Dan Molinsky at the Wall Street Journal wrote that cash purchases at gas stations are making a comeback. “More people are going back to buying gasoline with cash now that the pandemic’s over and since many stations offer cash-payment discounts, yet the longer-term trend is still moving toward plastic, according to a survey. NACS, a trade group representing convenience stores and fuel retailers, says its 2023 survey shows 24% of drivers typically pay for gas with cash, well above all-time lows of 14% during the worst of the pandemic, but slightly below the 26% rate in 2019. About 75% surveyed say they now typically pay with plastic (46% debit, 29% credit), up from 64% a decade ago but down from some 80% or more during the social-distancing days of the pandemic. About 1% say they use apps.
Oil price must work through the grind. The market needs to see evidence of tightening until they price it in. Yet the low price of oil is not encouraging investment and higher interest rates are taking dollars away from risk energy seeking safer returns.
We’re having a heat wave! Natural gas got a pop on expectations for strong cooling demand increase. The July Nymex gas futures contract gained 7.3 cents day/day and settled at $2.245/MMBtu. The natural gas market will also keep an eye on the Saudis.
Grains also are balancing the forecasts for rain versus heat as drought concerns are building. Grains sold off on more rain forecasts but are bouncing back as the heat rolls in.
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