Crude: All on board

May 22, 2017 08:43 AM
Daily Energy Market Analysis

Get on the OPEC/non-OPEC bandwagon! All other OPEC members are on board for the extension of production cuts leading to speculation that even a bigger cut might be in the works. Saudi Arabia’s energy minister, Khalid A. Al-Falih, said all producers have agreed to extend cuts for another nine months until global supply is back to the five-year average.

The Saud Oil minister said he also sees signs that the cuts are starting to have an impact. He noted drops in floating storage as well as the streak of falling crude supply in the United States. 

Compared to the last time OPEC met, there is a lot less skepticism about the cartel’s ability to cut production. In fact, there has not only been record compliance by the cartel, now there is record belief by OPEC watchers that they will follow through with production cuts. The OPEC, along with its non-OPEC co-conspirators, have grudgingly earned respect from market watchers. You might be able to argue about the impact the cuts will have on supply, but you can’t argue that the cartel is not serious about getting the market in balance.

This is one reason why we still believe that oil will head back to $60.00 a barrel and longer term to $73.00 a barrel. Prices probably would have been higher sooner but releases from the U.S. Strategic Petroleum Reserve and floating storage kept oil inventories relatively high.  

We also are seeing demand rebound. Many were worried about gasoline demand but as I said before, it was being overstated in part because we had bad weather. Now gas demand is soaring. In fact, AAA is predicting that we will see a surge in demand this Memorial Day weekend, the traditional kick-off to the summer driving season. AAA says travel volume will be the highest since 2005. They project that 39.3 million Americans will travel 50 miles or more away from home. “That is one million more travelers than last year taking to the roads, skies, rails and water.”

Natural Gas Is making a big comeback. This comes even as weather-driven demand is expected to sink to its lowest level of the year in late May according to Andrew Weissman of ECB Analytics. The June natural gas contract tested support near the 200-day moving average for the fifth time in the past week. After support held, the forward curve rebounded modestly. Weissman says that forecasts Sunday trended warmer, particularly in the 6-10-day window, creating the potential for the rebound to continue. As the Memorial Day holiday approaches, however, cash market prices for natural gas are likely to weaken considerably, limiting the upside potential this week. Power sector natural gas demand is likely to decline 1.5 bcf/d this week as temperatures revert toward normal throughout the nation.

Deal Maker in Chief! Present Donald Trump had a very successful trip to Saudi Arabia. In addition to a barrel-load of deals for weapons, there were many deals cut with U.S. energy companies. The energy industry will benefit and so will the American people because President Trump is bringing back energy jobs! Many thought this would hurt relations with the Saudis but in fact, it has turned out to be the opposite. Instead of a production war, Trump’s pro-energy agenda has warmed the Saudis’ heart. The state oil major, Saudi Aramco, signed contracts with a dozen U.S. energy firms including Schlumberger, Halliburton, Baker Hughes, and Weatherford to help Saudi Arabia develop local production. They will also cut deals with General Electric and drilling companies National Oilwell, Varco, Nabors Industries and Rowan Companies and others according to a Reuters report. Put one in the win column for all!

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.