Saudi Arabia is making an incredible offer to try to close the deal on a production freeze at the meeting in Algiers. The word on the street is that Saudi Arabia is offering to cut its oil production if Iran agrees to freeze theirs. The key to any production freeze, once again, comes down to these two adversaries and if the deal is going to get done, then they will have to agree.
A deal to freeze production by the major players like Russia and Iran and Saudi Arabia becomes more crucial as the market may have to absorb increased output from Libya and Nigeria. The Saudi offer to cut its own production in order to close the deal is a huge concession by the Kingdom to make amends for the failed talks at Doha.
Natural gas pulled back after the Energy Information Administration reported gas in storage increased by 52 bcf from last week. The number failed to inspire more buying after posting 18-month high the day before, but the surplus on the five-year average dropping to only 8% is raising eyebrows. The key in the coming weeks will be weather, which right now appears to be above normal temperatures for longer than what is normal.
While in the short term that may be friendly, an extending summer means the heating season will be shorter and therefore perhaps allow for the surplus to be built back up. Stil, l as we get deeper into winter most traders are expecting higher prices based on the buying and the spreads. We still believe the risk is to the upside and recommend locking in prices for the upcoming season.
Heating oil supply looks very ample going into the winter and even though we expect higher crude prices, it is likely that heating oil retail prices will remain mostly stable. We could see fluctuations of 30 cents a gallon either up or down but generally in that range assuming that the winter comes in, temperature wise, as somewhat normal.
RBOB futures dropped 9 cents from its peak to valley price as the Colonial Pipeline gets back to work. Prices at the retail level will also fall but still will remain higher than they would have been had we not had the incident in the first place.
Going into next week the key for the market will be inventory and OPEC. Oil had better see a build or the market will start to assume that supply and demand are in balance. As for OPEC a deal will have a big psychological impact on the price whether or not you believe the deal will have any real impact on supply.