Crude: Production showdown

Daily Energy Market Analysis

OPEC speculation and a strong dollar on trade war fears is providing highs and lows on the crude oil market. Oil was rallying on a big 5.9 million barrels draw in inventory, and a record-breaking week for U.S. refiners as they ran a seasonal record 17.7 million barrels a day crude oil last week, according to Energy Information Administration (EIA) data.

Oil was also rallying on speculation that OPEC, mainly Saudi Arabia and Iran, was ready to compromise on a smaller increase in oil production. Yet, the rally was stopped dead in its tracks after Minister of Energy Khalid A. Al-Falih said that it was time to change course and respond to the market. 

Khalid A. Al-Falih seems steadfast that the market needs at least an additional 1 million barrels of production if not 1.6 million barrels of additional oil. He thinks that the market is undersupplied. He, along with Russia, is trying to convince Iran, Iraq and Venezuela that if they don’t raise production it may cause a spike in price that could derail the global economy and kill the golden oil goose.

There was some speculation yesterday that a compromise was in the works and that the increase in supply might be smaller than the one million barrels that is largely priced in. Yet, Saudi’s tough talk seemed to suggest that may not happen. There is also some concern that we could see the cohesion between members break apart allowing the Saudis and the Russians to pump what they want even though they do not want that to happen. They are stronger together, to steal a Hillary Clinton phrase. Still, it is clear that many OPEC producers can’t raise output even if they wanted to for a multitude of reasons. Russian Oil Minister Alexander Novak has been pushing 1.5 million extra barrels a day. 

Yet, even if we get an increase in production, what is OPEC + 1 going to do for us in the future? The Saudi’s say they only have about 2 million barrels of spare production capacity. Who knows what the Russians have. And with flames burning in Libyan oil fields, it is going to lower spare oil production to historic lows. Reuters reported that East Libyan forces said on Thursday they had rapidly retaken the shuttered oil ports of Es Sider and Ras Lanuf, where the head of Libya’s National Oil Corporation (NOC) said he hoped operations would resume in a “couple of days helping ease those fears in the short run.”  

The EIA was supportive as record refinery demand offset slight drops in demand in gasoline and distillate from record levels. Overall demand fell to 25.5 million barrels per day. U.S .domestic demand fell 1.6 Million barrels, yet export demand increased 541,000 barrels. Gasoline’ stocks increased 2.5MB this week. 

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.