The only thing that the Organization of the Petroleum Exporting Countries “OPEC” has to fear is fear itself, that and declining demand, a rising dollar and the shale oil producer.
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While OPEC preached calm to its members, a rise in the dollar overshadowed geopolitical risk fears, and winter’s early return caused oil to tank after early gains. OPEC’s new catch phrase is “don’t panic“ as expressed by OPEC Secretary General Abdullah al-Badri, Kuwaiti oil minister, Ali al-Omair, a message coming down from none other than Saudi Oil Minister and cartel leader Ali Naimi Himself. OPEC is giving oil bulls little to hang their hat on.
Even the United Arab Emirates economy minister Sultan bin Saeed Al Mansouri said that declining oil prices won’t have any material impact on their economy and that OPEC will not cut production. The message is clear that OPEC is going to pump oil until hell freezes over. Of course with the weather forecast being what it is, that might be sooner rather than later.
The dollar also is at play in driving down prices. The Japanese Yen hit a 7-year low against the dollar as Japanese Prime Minister Shinzo Abe signaled that he may forgo a retail sales hike in effect adding more liquidity expectations than already priced in. The dollars drive higher as the U.S. economy continues to outshine the rest of the globe, putting us on different paths in interest rate directions. It reverses the flow of hot money into the emerging markets that we saw as the U.S. deleveraged. Now the leverage is coming back as Japan and Europe start to stimulate, driving stocks in the U.S. and Japan to dizzying heights with no end in sight. At least until the new bubble pops.
Heating Fuels that started off strong ahead of the polar plunge weather reports reversed as well. Natural gas broke a string of 9 up days revering to close lower after hitting the highest price level since June. Ultra low sulfur diesel also fell hard after Midwest cash markets fell after the near panic buying that we saw last week. It seems that for now the market feels the cold blast is priced in and we will await to see if the weather is as bad as forecasters say it will be.
Yet we know that refining demand should be good. Refining margins should keep U.S. demand for crude strong as it tries to replenish gas and distillate supply that is seeing strong demand. In both gas and distillates supplies are below the five year average.
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Oil traders will also want to see if U.S. production falls after the recent drop in price. A drop in oil rig counts is a sign that the rapid pace of U.S. production may slow. Oil exports in the U.S. hit a 57 year high, so it is no wonder that OPEC will be watching for any signs of weakness from the U.S. shale producer. OPEC knows that the U.S. crude oil export ban is going to fall apart as shale condensate is going to be exported regardless. OPEC is convinced that if they don’t panic they can bury the U.S. shale revolution. They know to counter the shale threat they have to hang together or almost assuredly they will hang separately. It’s all or nothing! Don’t Panic, all is well!
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