The Empire Strikes Back!
In OPEC there was a tremor in the force and the Saudis wasted no time in sending a message to the ne'er do wells in the cartel that you can't mess with the kingdom. The Saudis wasted no time in ramping up production in the aftermath of the "worst OPEC meeting" ever. Reports from a Saudi newspaper, al-Hayat, suggested the Saudis will increase production to over 10 million barrels a day by about 1.14 million barrels per day, which is a 13% increase. That jump will drive Saudi production to the highest level since 1981 and help fill the void left by the loss of Libyan crude and the expectation of rising demand in the third quarter of this year. At the same time other OPEC members and non-OPEC countries will be inspired to ramp up production to protect market share. It appears the fears that world demand might exceed global supply by 1.45 million barrels per day in the third quarter using OPEC figures won't come to pass, erasing the fear of a production deficit.
Not that all of our problems are over. There are fears that the Saudi increase in production will cut into spare production capacity. With tensions running high across North Africa and the Middle East as the Arab Spring looks like it will run into summer, it will keep the market on edge. Not to mention tensions in China. Reuters News reports that, "Riot police fired tear gas to disperse rampaging migrant workers in southern China protesting over the mistreatment of a pregnant street hawker by security guards, media reports said on Monday, the latest in a series of protests across the country. Hong Kong television showed crowds of workers from the southwestern province of Sichuan running through the streets of Zengcheng, near Guangzhou, over the weekend. They smashed windows, set fire to government buildings and overturned police vehicles. It showed riot police firing tear gas and deploying armored Vehicles to disperse the crowds and handcuffing protesters." Still we should see a choppy downtrend into the mid-eighties unless we see a major disruption.
Speaking of China their inflation data this week could send shockwaves through the oil market. The data that comes out Tuesday or overnight in the US could cause major concerns about China's demand outlook moving forward. Signs of slowing in China coupled with high inflation seem to be setting up worries of stagflation. A reading above 6% would create a very difficult situation for the Chinese government and a murky outlook for oil.
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 firstname.lastname@example.org.