In a world awash in crude supply OPEC has had it pretty darn good. The cartel that always puts its own interests first seems to be getting a little testy with each other as the competition for a declining market share may be causing some tension. This behind the scene squabbling may have come out in the open when Reuters News and the Globe and Mail reported that Saudi Aramco, the Saudi State oil company chief executive Khalid al-Falih, declared that global oil demand has bottomed and the state owned giant stands ready to increase production when more is needed. The Globe and Mail quoted him as saying, "We believe that the market has bottomed in terms of demand and has already begun picking up," he said. "And Saudi Aramco will be responding to the economic recovery that has ensued with appropriate adjustments. But those will be determined collectively and not singly, either by the company or by the kingdom." Of course when the Saudis speak the market listens yet at the same time are they sending a message to other members of the cartel that the kingdom is tired of holding back on production while others profit by taking their market share.
Early this morning the OPEC Secretary said in so many words hold on there and don’t rock the boat baby. Dow Jones Newswires reports that OPEC Secretary-General Abdalla Salem el-Badri said the current price of oil is satisfactory and members of OPEC should take more care to stick to their agreed quotas. "The current oil price is comfortable," el-Badri said at a press conference in Vienna to mark the 50th anniversary of OPEC. He said the speed and strength of the global economic development wouldn't accommodate price supporting output changes by OPEC. "We don't want to rock the boat," el-Badri said, although he added that a higher price target could arise if production costs increase and the global economic recovery takes firm hold. He said a higher target price? Like what? $100 a barrel? $200 a barrel!? It sounds like Mr. el- Badri wants to leach off the economic recovery as opposed to encourage it. In fact OPEC has done little to help the global economic recovery by withholding supply. Yes the world is well supplied but perhaps the world would be better served with $50 a barrel oil than $80. While the Saudis are taking a more responsible approach it seems like the greed from some members of the cartel may cause further division.
We did see compliance improve which is a bit of a phenomena that sometimes happens right before they go to a soiree like the party in Vienna to mark 50 years of conspiring to fleece the globe. According to Bloomberg News OPEC’s compliance with output quotas agreed to in 2008 rose in August as lower Nigerian production offset increased pumping in Angola. Daily output from the 11 members bound by quotas dropped 37,000 barrels to 26.799 million barrels in August, the group’s Vienna-based secretariat said today in a monthly report. That implies compliance of 53.5% compared with a revised 52.6% for July. I guess anything above 50 based on a curve is a passing grade for OPEC but I do not think the Saudis are pleased. The talk of increasing production and reminding us and other oil producers of their massive spare capacity is a subtle reminder to not cross the kingdom. Bloomberg reported that the group’s commitment to a 4.2 million barrel-a-day cut to 24.845 million has dropped by almost half as oil prices rebounded.
Speaking of rebound, we are seeing that in the dollar which is giving oil and the other commodities a break. Tropical activity is still going wild and is supportive to price despite the lack of any major inherent risk of major damage. The market seems to be waiting on the retail sales data for direction and if stocks rally and the dollar breaks we should see oil rally. If not we could brake back hard. Interesting to watch will be tonight’s API and see how they recover from that massive crude draw they reported. Will the API go up big on crude supply or will the EIA fall. Stay tuned!
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at email@example.com