Can Central Banks Bail Out OPEC
As OPEC is getting ready to meet next week in what will be their most important meeting in recent memory, it seems that global central bank actions may be doing some of the heavy lifting to support global oil demand expectations. Not only do you have China pumping a reported 50 billion yuan, the equivalent of $8.2 billion, into their system, you have European Central Bank (ECB) Chairman Mario Draghi saying the ECB must drive inflation higher. The hope is that these measures can list the Chinese and Euro-zone economy out of its funk and increase it shaky oil demand.
The key to the success of the move may be determined by the move in currency exchange rates. Already we are seeing a big move in the dollar as well as a drop in the euro. The key is for the moves to be orderly so the purchasing cost for oil in China and Europe doesn’t outweigh the benefit of demand created by easy money. Because the oil is already oversold and the dollar is near multi-year highs that risk seems to be not a big worry at this point. Yet if the moves become manic then oil could falter if the dollar gets a super spike.
The cold is also coming into play, most notably on the Ultra-Low Sulfur Diesel vs. RBOB spread, which in the old days is known as the heating oil gasoline spread. It is working because more people have to use more heating oil and in some states driving demand will be down because people can’t find their cars under the snow.
OPEC meeting speculation has also slowed oil’s downfall. Unconfirmed reports of a deal to cut production were making the rounds but they do not seem to be based in fact.
The other thing to watch is the Iran nuclear talks as they seem to be going into overtime. Secretary of State John Kerry flew to Vienna to try to negotiate a final deal. A deal with Iran would be bearish as a softening of sanctions would unleash more oil onto the market. Iran’s oil Minister Bijan Namdar is already on record as saying that Iran will not cut its output by one single barrel. This should make for a fun OPEC meeting next week.
Natural gas rocked up and down after the bullish Energy Information Administration supply report that showed a 17 bcf withdrawal. With the potential for more cold and potential well freeze offs we should expect a triple digit withdrawal next week. Are you sure it isn’t January?