OPEC: Keeping it together

Daily Energy Market Analysis

All is well in OPEC land. OPEC kept it together with a unanimous deal, even though there is still disagreement on what the deal in Vienna means. Post OPEC, we have a rising dollar on China/U.S. trade tensions and a major Canadian oil sands outage that will buoy U.S. prices.

The market soared on Friday as it seemed that OPEC and plus one Russia seemed to have overpromised and underdelivered. Yet, there still seems to be a suggestion by Saudi Arabian Energy Minister Khalid Al-Falih that we could see an increase of a million barrels of oil at some point, especially if their customers demand it, opposed to the 600,000 or 700,000 barrels other cartel members said would be added to the market. OPEC, which everyone thought would cheat, over-complied. Part of the agreement is to not underproduce its quota by OPEC members, which makes the math on the OPEC increase even fuzzier.   

The Russians said they backed the proposal and that President Donald Trump’s tweets had nothing to do with the decision to raise production. I am not sure Iran and Venezuela were convinced but is a sign of OPEC teamwork and perhaps they went along mainly because they had no real choice. They felt they had more to gain by going along as opposed to not going along and risk weakening oil prices even more.

We have seen the Brent crude start to break back, but the West Texas Intermediate is on the rise as the U.S. rig count is leveling out and a major Canadian oil sands outage may drain the already tenuous stockpiles at the Cushing, Okla., delivery point. 

That will tighten supply and with signs that U.S. shale oil produces must slow down due to logistical issues, we could see U.S. supply tighten drastically. This should bring in the wayward Brent versus WTI spread to a more normal rate. On top of that, you had weather issues in the Houston Shipping Channel that could restrain supply on the Gulf Coast further tightening U.S. crude supply. The total rig count fell by 7 to 1,052, according to Baker Hughes. The active oil rig count fell by 1 to 862, the first reduction in 12 weeks while gas rigs lost 6 to 188; two rigs remained classified as miscellaneous. 

U.S. refineries have done a great job in bringing gas prices back down. They have refined and produced gasoline at a record pace, yet their luck may be running out. The Canadian oil sands outage will offset the recent drop in the national gas price average, which has fallen 5.3 cents per gallon versus last week to $2.83 per gallon, according to GasBuddy.

Diesel fuel will also feel the squeeze at some point. If you’re not hedged, please do so. For oil, the risk of new highs by the Fourth of July is a long shot but not an impossibility. Of course trade war fears are helping the market stay somewhat calm.  

EBW AnalyticsGroup on natural gas says that despite forecasts for very hot weather next week — which is currently expected to continue for several days after the July 4 holiday — natural gas futures started to head back down last week. This decline was most likely attributable to (i) expectations that U.S. natural gas production will continue to climb rapidly this summer, and (ii) forecasts calling for extreme hot weather to moderate by mid-July. A bullish shift in the 6-11 day forecast over the weekend could briefly prop up gas prices, but not by much or for very long. 

Although moderate temperatures this week may lead to flat demand, surging heat next week over the July 4 may yield rising day-ahead electricity prices with  power sector gas demand soaring 2.9 Bcf/d week-over-week.

About the Author

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