Crude: OPEC optimism

July 24, 2017 08:52 AM

OPEC and non-OPEC leaders are wrapping up their meeting in St. Petersburg Russia and it looks like it has yielded some positive results. Not only did Nigeria agree to cap their oil production output at 1.8 million barrels a day, the Saudi Oil Minister Khalid al Falih, speaking after the meeting broke up, seemed optimistic that the path they were on would eventually get global supply back in balance. That optimism was shared by Russia's energy minister Alexander Novak who stated that the situation in the oil market is "positive" and while the market remains volatile, the fundamentals are sound.

The OPEC/non-OPEC meeting was not without drama. The oil market sold off hard on Friday on doubts that OPEC and non-OPEC members could keep it together as production from Libya and Nigeria continued to rise and Saudi output rose to meet domestic needs. For the Saudis, they focused on production and not on domestic Saudi inventories which are plummeting and on Saudi exports to the United States, which are falling as well. The Russian oil minster did make demands that Libya and Nigeria join cuts as well and so we know that at least Nigeria has agreed to a quota.

That may be why the Saudi oil minister Khalid Al Falih sounded so optimistic. He says that the global economy is in its best place since the financial crisis and that is good for oil demand. The Russian oil minster did make demands that Libya and Nigeria join cuts as well and so far, we know that at least Nigeria has agreed to a quota. Libya says it targets OPEC and has removed 350 million barrels of oil a day according to Dow Jones and the Saudi oil minister says he knows the market sentiment is bearish but he is up for the challenge to change that perception. In fact, he said that the cartel is looking beyond the agreement in 2018 to ease out of the deal so they don’t shock the market. Both the Saudi oil minister and the Russian oil minister said that they will continue to monitor compliance. They also seemed to suggest that they pressured some countries that, let’s just say, were slow to comply.   

This comes as the U.S. oil rig count sputters as we are seeing more signs of a shale pullback after being beaten with lower prices. Smaller shale firms are struggling to lock unprofitable hedges for 2018 and the curve is still too cheap to payback their debt and make a profit. Frack crews are also getting harder to find, making it harder and more expensive to complete wells that will eventually lead to lower production per shale well. Some capped wells may stay capped unless we see a big turnaround in price. Baker Huges reported oil rigs down by 1 to 764 rigs this week and natural-gas rigs, down 2 at 950.

I’ll let you in on a little secret. The global market is in balance. Demand is exceeding expectations in recent weeks and global oil inventories are plummeting. We are turning a corner in the oil market and despite crazy moves, we should start to move much higher. It might be too late to stop another reduction in U.S. shale output, but it should be good for oil bulls.

Natural gas is weak on a cooler forecast. Look for a 27 bcf injection this week. That should give us a pop even as the forecast is bearish.

The AP reports that the average price of a gallon of regular-grade gasoline rose about a penny nationally during the past two weeks, to $2.32. Industry analyst Trilby Lundberg of the Lundberg Survey said Sunday that the slight increase comes after 11 weeks of decline. The current price is about 10 cents above where it was a year ago. Gas in Reno, Nevada, was the most expensive in the United States at an average of $2.99 a gallon. The cheapest was in Jackson, Mississippi, at $1.97 a gallon. The U.S. average diesel price is $2.51, the same as it was two weeks ago.

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.