The big OPEC meeting is about to start and already comments from OPEC leaders is impacting crude oil prices. Yet it might be a warning from the OECD that may actually have more influence on the oil trade today.
Oil prices were trading above $50 a barrel but retraced after some month end profit taking and some selling reaction to comments from the UAE’s oil minister. He seemed to suggest that OPEC strategy was working as market forces seemed to be getting the global oil market back in balance. U.A.E. Oil Minister Suhail Al Mazrouei broke markets when he proclaimed that “From the beginning of the year until now, the market has been correcting itself upward. The market will fix itself to a price that is fair to the consumers and to the producers.”
Yet, the UAE oil minster may want to heed the warning of the Organization for Economic Cooperation and Development (OECD) about the risks to global economic growth. The OECD says the global economy is in a “low growth trap” and is blaming governments for relying on fiscal policy instead of economic reforms to solve Its problems. OECD chief economist Catherine Mann said “The need is urgent. The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, to create economic growth.”
Because of that they lowered its growth forecast for the combined economy of the 34 OECD countries to 1.8% this year and 2.1% in 2017 down from 2.2% and 2.3% last month They did increase the forecast for the Eurozone but they say that an if the UK voted to leave the Euro-Zone or do a Brexit as it is called would send economic shockwaves across the global economy and 'substantially depress growth in Europe.
I agree that a Brexit is not to be taken lightly. If you remember when Greece voted to leave the EU before they said it was a vote to stay, it caused the Eurozone to sink into a recession and may have slowed the Chinese economy that helped lead to turmoil and the low growth, we saw in the beginning of this year.
Still, market forces should also be in focus after the close as the American Petroleum Institute reports what should be another big drop in supply. We will continue to see the impact of the lost production from the Canadian wildfires as well as strong demand. Gas supplies should fall as supply went up on the rack ahead of what might be a near record demand over the Memorial Day holiday weekend.
Distillate demand should also have been strong as farmers are still planting their crops. This could lead to a 3-million-barrel drop in oil supply as well as gas and products. Refiners probably ramped up production and we should see U.S. oil output fall yet again. Despite the OECD warning and OPEC chatter the fundamentals look friendly and still bodes well for higher prices.
We have been talking about the possibility that natural nas is undervalued if we get normal or above normal temperatures. Heat in the Midwest and the outlook for more caused a nice rally in natural gas. We recommend buying call options and we did so yesterday as well. We also have just starting Hurricane season and with falling rig counts on land we will be more reliant on the Gulf of Mexico for supply. This comes as we expect record high demand for natural gas because of increased reliance on gas for power generation. Say goodbye coal, hello gas this summer. The rally may just be beginning. Yet we still have to stay hot to use up over supply but we will be shocked how much gas we might use this summer.