The Federal Reserve takes out its reference to "stabilizing oil prices" and the Saudi's are dropping hints of an oil production cut. This comes as U.S. oil production sputters and inventories falls. We may have just hit a bottom as crude oil companies quickly react and probably overreact regarding July's oil price crash.
The Federal Reserve, in its statement, said that they see some progress on inflation, but it is still a tough call on a September rate hike. The main reason is because of the drop in oil prices, or lack of stabilization as they called it, which may be their way of acknowledging problems with China's slowdown without mentioning China. It is obvious that the Fed, like all of the big oil companies, has noticed the July commodity crash and is wondering if this is the end or only the beginning. Obviously, if China is coming into a deflationary downturn and interest rate rise in the United States might add to pressures. If those pressures spread, then deflation will be the Fed's problem and you might not ever see that 2% inflation target get hit? Did the Fed blink, oil traders thought so and bought the news.
No Mas! Saudi Arabia is dropping hints that they are getting ready to cut production at the end of the summer. Are The Saudi's cutting back in anticipation of Iranian crude or are U.S. shale producers just too resilient? Dow Jones wrote, "The world's top crude-oil exporter, Saudi Arabia, is planning to pull back from record-high levels of production at the end of the summer when domestic energy demand subsides, according to people with knowledge of the matter."
The reduction could begin as soon as September and would amount to about 200,000 to 300,000 barrels a day, bringing production to about 10.3 million barrels a day, the people said. Saudi Arabia told the Organization of the Petroleum Exporting Countries that it produced 10.56 million barrels a day in June, a record high.
Shale, of course, will be chilled especially if you look at Shell's earnings call as the company prepares for what it says can be a "prolonged downturn" in oil prices. It seems that Shell is hoping for the best but preparing for the worst as its second quarter profits came in at $3.4 billion--down from $5.1 billion for the same quarter a year ago. The Company said that they were going further cut the 2015 capital expenditure (capex) to $30 billion, down by 20% from a year ago and cut 6,500 jobs during the year. Shell Chief Executive Officer Ben Van Beurden said, "We have to be resilient in a world where oil prices remain low. These are challenging times for the industry, and we are responding with urgency and determination." Over, maybe, panic.
Oil Inventories also provided a boost and a case for a bottom when the Energy Information Administration reported a big drop of 4.2 million-barrel stockpiles last week and a drop in oil production. EIA data on oil production estimated output in the lower 48 states down 151,000 barrels per-day last week. Now with more cuts coming across the energy sector, U.S. output is going to face new challenges. That comes while U.S. demand is strong! The EIA reported that total products supplied over the last four-week period averaged 20.1 million barrels per day, up by 3.8% from the same period last year.
During the last four weeks, motor gasoline product supplied averaged over 9.5 million barrels per day, up by 6.2% from the same period last year. Distillate fuel product supplied averaged over 3.7 million barrels per day over the last four weeks, down by 3.6% from the same period last year. Jet fuel product supplied is down 3.1% compared to the same four-week period last year.
We also get the natural gas report today! Analysts and traders surveyed by The Wall Street Journal expect the agency to report that 54 billion cubic feet of gas were added to storage last week, more than is typical for this time of year. If the storage estimate is correct, inventories as of July 24 will total 2.882 trillion cubic feet, 26% above the year-ago level and 3.1% above the five-year average for the same week.