Oil backtracking as China manufacturing falls

Back Track

Oil is backtracking and the outside markets seem to suggest that the Federal Reserve will have to do the same. Oil prices are trying to balance weak manufacturing data out of China versus today's Fed decision. Oil is getting hit hard after National Bureau of Statistics and China Federation of Logistics and Purchasing reported that China's manufacturing sector fell to a reading of 50.6 just barely above expansion and coming in lower than estimates. That comes one day after the Chicago Purchasing Manager report showed the Midwest area falling into contraction and is raising the odds that today's ISM manufacturing number will disappoint.

A month ago it seemed the Fed was struggling to come up with an exit strategy but now it is likely they may have to back track. A marked slowdown in manufacturing globally and rising unemployment in Europe along with fears of falling prices, may force the Fed to alter their most upbeat Fed statement in sometime. With inflation faltering and U.S. data less than spectacular, the Fed really can't be thinking that they can leave last month's statement alone. The market is suggesting that the Fed will have to signal more accommodation and not less.

The shale gas revolution in the U.S. may be shaking the foundations of former production kingpins like Russia and Saudi Arabia to the core. The Wall Street Journal reports:

A rare public dispute over oil policy in Saudi Arabia emerged Tuesday as the kingdom's oil minister and a senior member of its royal family disagreed over long-term production targets for the world's largest crude exporter.

The Middle Eastern kingdom, which produces around 10% of the world's oil, needs to increase its crude production capacity by a fifth to 15 million barrels a day by 2020 in order to meet rising domestic consumption and maintain its current export capacity, said Prince Turki al-Faisal, a former intelligence chief and ambassador for the kingdom. Comments from the prince, who has no formal government position, but is a prominent member of the kingdom's royal family, were contradicted by Saudi Oil Minister, Ali al-Naimi. There is currently no need to increase crude production capacity beyond 12.5 million barrels a day, Mr. Naimi said.

Saudi Arabia currently produces around 9 million barrels a day of oil, leaving 3.5 million barrels a day as spare capacity. The level of Saudi Arabia's spare capacity is closely watched by oil markets. Two of the strongest periods of oil price increases—from 2003 to 2005 and 2007 to 2008—coincided with OPEC spare production capacity, most of which is in Saudi Arabia, falling to historic lows. "Saudi Arabia's national production management scheme is set to increase total capacity to 15 million barrels per day and have an export potential of 10 [million] barrels per day by 2020," Prince Faisal, a former Saudi ambassador to the U.S. and U.K, said in a speech at the Belfer Center for Science and International Affairs of Harvard University. The speech was delivered last week and posted on the center's website late Monday.

The prince clarified his position in an email Tuesday. "Saudi consumption may reach five million barrels of oil by then [2020], hence the production capacity of fifteen million barrels," is required to maintain the country's export potential, he said. Saudi Arabia would be lucky to go past production of 9 million barrels a day by 2020 and, "we don't see anything like 15 million barrels a day before 2030, 2040," said Mr. Naimi in an appearance at the Center for Strategic and International Studies in Washington DC Tuesday. Any decision to increase capacity would be taken by Saudi Arabia's oil ministry, which directs Aramco, or the kingdom's Supreme Petroleum Council, which is chaired by the king.” A must read.

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