Crude: Freeze up!

October 27, 2016 08:28 AM

While the Energy Information Admintation reports another drop in crude stocks, doubts about a OPEC/non-OPEC accord was met with skepticism. The main reasons that the doubts came about was because of comments from Iraqi Oil Minister Jabar Ali al-Luaibi that Iraq should be exempt from production cuts and a report from Interfax from an unnamed source that said Russia would not be freezing or cutting production. Traders assumed this would be the end of the OPEC/non-OPEC deal; but not so fast.

Russian oil minister Alexander Novak denied reports that Russia would not be open to production cuts. While he said that the final numbers have not been worked out, the negations were going along just fine. He also told Reuters that a potential global deal to cap oil production is unlikely to collapse because of Iraq's claim that it would not curb its output. In other words, Iraq’s declaration that they should be exempt from cuts is just a contrivance to get a higher quota from the cartel.

We may get a better idea on the deal and its progress as OPEC will have a “technical” meeting on Friday and a meeting with non-OPEC members on Saturday. It is very possible that we may get a sense of what the deal is going to look like ahead of next month’s OPEC meeting on Nov. 30. 

The technical meeting is coming against a backdrop of a market that seems to be showing more signs that the supply demand situation is already in balance. Once again the Energy Information Administration reported that U.S. crude oil supply fell 553,000 barrels even as refinery runs ticked up slightly to 85.6% of capacity from their lowest levels of the year. As refiners start to come out of seasonal maintenance we should see increased supply drawdowns based on current trends. Add to that the prospect of a cut or a freeze pledge by OPEC and non-OPEC nations and that should set the stage for a nice end of the year rally.

We also saw gasoline stocks fall by 2 million barrels as demand went up and U.S. exports of gasoline set a record high of 811,000 barrels per day. U.S. refiners are seeing their margins hang in as they find a market for ready to use gas in Mexico and Venezuela. Retail gas prices have fallen as we are seeing the results of recovery from pipeline mishaps and hurricane Matthew disruptions.

We also saw a big 3 million barrel drop in distillates. Strong demand continues to keep this market on a supply tightening trend.

November warmth is causing natural gas to collapse. Winter delayed is a natural gas reason to fall. Today we will see what the EIA has to say about supply! The market is expecting a 75 bcf injection.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.