What OPEC Price War? Really?

Poor Ali bin Ibrahim Al-Naimi, the de facto leader of the OPEC cartel, he is not a bad guy, it seems he is just misunderstood. Al-Naimi helped break the oil market as he spoke at the Mexico Conference and gave no indication that he or his cartel would cut production. Al-Naimi said that the talk of a so called Price war was just a little misunderstanding… despite the fact that Saudi Arabia cut U.S. crude prices for their oil and is raising them in the rest of the world in an effort to dump oil into an already well supplied U.S. market. Al-Naimi said OPEC does not set the price for oil, the market does, so this more dumping of supply thing wont impact the market. Nah, he is just looking for steady prices that he says will benefit all. Of course what he really meant to say was that OPEC, while encouraging dialogue with ‘Non-OPEC” producers right now has no intention of giving up any more market share to these upstart sale producers.

This comes as the global demand outlook continues to falter and more supply that may come online. NATO accusing Russia of sending more troops into the Ukraine is increasing the odds of more European Union and United Sates sanctions on Russia. So far sanctions have slowed growth in the Eurozone and traders view the Russian threat more of a threat to demand than supply at this point. Traders are now wondering if OPEC’s point of pain may come before U.S. producers.

There are more signs that China’s oil demand might not live up to expectations going forward. China's industrial production and retail sales numbers missed the mark adding to the perception of weakening demand in the world’s number 2 oil consumer. China’s output rose 7.7% in October from last year missing the 8% expected. Retail sales came in at 11.5% less than expectations.

The market is also getting ready for the possibility of more supply. Libya’s oil fields reportedly are up and running and talk that a deal with Iran that could further lighten or lift sanctions on oil could unleash Iranian oil back into an oversupplied global market. The market at this point is failing to heed the warnings from the International Energy Agency to look through the current oversupply and the rising risks.

The Energy Information Administration added that rising U.S. crude oil production boosted estimated commercial oil inventories by 20.2 million barrels in October, the biggest increase in oil stocks for the month in 12 years and the fourth largest since 1920.

The good news of course is for drivers, The Energy Information Administration (EIA) is joining my call for a new era of cheap gasoline. The EIA is saying that U.S. gasoline prices should fall below the $3 a gallon area and average under $3 for all of 2015. The EIA decline in gasoline prices reflects the sharp drop in crude oil costs for refiners caused by rising crude oil production and weak fuel demand.

The EIA also releases its weekly “Petroleum Status” report which gives us insight to supply and demand. If it is anything like the American Petroleum Institute supply and demand report you should expect to see refiners run wild. Record low Mid-West gasoline supply and shortages of diesel not to mention healthy margins drove refinery runs to 90.2% of capacity. That dropped crude supply by 1.5 million barrels and helped boost gasoline by 1.1 million barrels. Yet refiners failed to build distillate fuels which fell by 1.3 million barrels as demand for heating oil and diesel fuel soared in anticipation of winters early return.

The EIA also lowered its price outlook for natural gas saying the spot price will average $3.97 a million British thermal (mmBtu) down from its last estimate of $4 mmBtu. They lowered the forecast because of a record 2.7 trillion cubic feet of natural gas was put into storage by the start of the U.S. heating season this month. And the hopes that this winter will be warmer than last.  With the weather this week I would have to say that the fine analysts at the EIA need to get out more often.

The EIA also said U.S. crude production is at the highest level since 1986 and is on target to exceed 9 million barrels per day. As far as the oil price drop and  threat  they say that “lower crude oil prices may curb drilling activity in some lower-producing U.S. basins, but total domestic oil production should continue to increase through next year as crude prices will be high enough to support most drilling in the major shale oil producing areas of Texas, North Dakota, New Mexico, and Colorado.”

They also say that “Global oil markets loosened considerably over the last two months, as world oil inventories increased by about 600,000 barrels per day in September and October, marking the third straight month of rising oil stocks. Recent global inventory builds are in contrast to this time last year, when stocks fell by 700,000 barrels per day.” “Continued growth in global oil supply in the face of weak oil demand will push crude prices lower in the near-term. The average price for Brent crude oil is expected to be about $18 a barrel lower next year than previously forecast.”

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