While petroleum products have to adjust to tensions between Russia and Ukraine, spot product shortages in parts of the Midwest, and the possibility of improved relations between Japan and China, OPEC has other problems. The Organization of the Petroleum Exporting Countries (OPEC) has to adjust to shale oil production that continues to rock their world. OPEC’s market share is under attack and they have to act because it’s a shale world after all.
OPEC in their own “World Oil Outlook” reported that the demand for their oil in 2017 may hit only 28.2 million barrels per day, the lowest level since the year 2000, a time before the China economic explosion and a time when oil was trading in the $20 and $30 handle or range area. It was also a time that forced OPEC to come together like never before and stop cheating on production levels and a time that began the most successful run in cartel history. Yet the predicted 800,000 barrel a day drop in demand for their oil is going to present real challenges.
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Shale oil is why we are in a price war. The U.S. shale producers may have started it, but it is Saudi Arabia that wants to finish it. OPEC ministers know they are in a price war, as it gets ready to meet Ali Naimi who will be preaching patience and unity. He will try to resurrect the magic that saved the cartel from disaster in 2000. They will try to introduce a version of the “price-band” that worked somewhat in the last decade by vowing a production cut if oil falls below $70 a barrel basis the OPEC crude basket.
Of course, even with the price band, OPEC really did not have to alter production. Just the fear that they might helped sway prices. After a few years when demand continued to soar, the price band became obsolete anyway. The big question for OPEC now is if financially strapped OPEC members, like Venezuela and Nigeria, can outlast the U.S. shale oil producer as it is a shale, shale, shale world.
Yet it was gasoline and diesel that led the complex yesterday. Gas futures rose as Midwest gas supply fell to record lows as pipeline issues, refinery maintence and strong demand dwindled gasoline supply. Diesel product shortages have been reported with some terminals totally empty causing a scramble in Midwest and Chicago cash markets. Farmer demand is going through the roof as they want to get crops in before the expected polar vortex weather pattern that is going to descend on the Mid-West.
RBOB also received support from Brent Crude that is dealing with increased Libyan risk and a possible war in Ukraine. A military buildup, some claim by the Russians and some by Ukraine, is putting risk back in oil. So much for deals to restart gas exports, if all-out war breaks out just how secure will gas supply be? What kept Brent crude from really spreading away from West Texas Intermediate crude were reports that Libya will restart Sharara, its biggest oil field, after an attack that halted output.
The Wall Street Journal is reporting that China and Japan will improve relations and agree to disagree on their disputed islands. This is a slight lessening of one of the risk factors that traders in the past fretted about.
Oil today will focus on the Jobs Report and the meeting of Central bankers in Paris. Yesterday European Central Bank Chairman Mario Draghi talked a good quantitative easing “QE” game, but can he deliver. Beware of strange market moves as Central Bankers will be speaking throughout day.
Forget that bearish Energy Information Administration (EIA) Supply report in natural gas, because the market did. Forget the fact that the injection came in at 91bcf well above expectations and we came in just 6.8% below the five year average, the market dipped and is pricing in the coming “polar vortex”.! Bundle up!
On top of that the EIA warned that “Coal stocks at electric power plants, which totaled 121 million tons at the end of August, are relatively low in both absolute and days of burn terms relative to recent historical norms. This is true both nationally and in the Upper Midwest. About two-thirds of coal used to generate electric power moves from coal mine to power plant either fully or partially by rail.” That should increase demand for natural gas.
So total working gas in storage was 3,571 Bcf which is238 Bcf less than last year at this time and 261 Bcf below the 5-year average of 3,832 Bcf.
The Price Links Video series gives insight across the financial spectrum. https://www.youtube.com/playlist?list=PLDq9JQANqxRxCBaHqunzBT4Frxitjw-XV.
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