Saudi’s say, 'enough is enough'

Daily Energy Market Analysis

It appears that Saudi Arabia is saying "enough is enough" when it comes to the correction in crude oil and wants to set the record straight, just one day after an unscheduled Joint Ministerial Monitoring Committee with all the OPEC and Non-OPEC conspirators, Saudi Arabia wanted the market to know that they were not flooding the market with oil.

Even though Saudi Oil Production increased by 750,000 barrels in June, July levels would remain unchanged. In fact, the Saudi said that their oil exports would fall by 100,000 barrels a day and even though the Saudis and Russia are increasing output, they project that global oil inventories will see substantial drawdowns in the second half of the year.

And that is what I see as well. As oil sold off after signs that OPEC and Russia would raise output, the truth is that the increase is hardly going to be enough to stop oil stockpile declines later in the year. Even with U.S. record production, the combination of record oil demand, along with declining production from Venezuela and sanctions on Iran, we will be in a supply deficit when we see the end of the year demand increases kick in. Reuters is reporting that Japan's last imports of Iranian oil could be in October. Also, in a sign that global demand is strong, we saw that Asia oil buyers snapped up cargoes from Europe and Africa after Brent prices fall.       

The Saudi news seemed to help oil establish what should be the lower end of our trading range and the higher end of the range is probably close to $75 per barrel. Yet, late in the year as the supply drops kick in we should see oil move toward $80. 

Many thought that President Donald Trump’s tough talk on OPEC and threats to tap the U.S. Strategic Petroleum Reserve (SPR) would lead to an oil glut, but the Saudi’s have no interest in crashing prices. In fact, the good relations between President Trump and the Saudis may be tested as congress is going after OPEC. Bloomberg News reported that-- OPEC is consulting with lawyers to prepare a strategy to defend against proposed U.S. legislation that could open the cartel up to antitrust lawsuits, according to people familiar with the matter. 

The cartel is seeking strategy recommendations for dealing with the OPEC bill, which could allow the U.S. government to sue it for manipulating energy prices, the source said. (Hey, wait. Is President Trump manipulating prices by releasing oil from the SPR? Just asking.) Even as The Russians and the Saudis added more oil, the House of Representatives introduced a version of the bill in May. The Senate earlier this week also brought up a draft of the legislation, which would amend the Sherman Antitrust Act of 1890. That’s the law used more than a century ago to break up the oil empire of John Rockefeller.

Natural gas can’t beat the heat. The Energy Information Administration (EIA) reported that Nat gas inventories increased by 46 BCF’s. A small injection even though dry-gas production in lower 48 states totaled 78.4 bcf, up 7.6% from last year. Strong manufacturing but also heat-related demand is the main culprit. Consider this Bloomberg tidbit. North Texas smashed a 93-year-old daily heat record Thursday, with the mercury climbing to 108 degrees Fahrenheit (42 Celsius) in the Dallas-Fort Worth area. How hot was it?

Reuters Is warning also that U.S. LNG exports to China declined as trade war escalates. This means that with record production and the potential for slowing exports natural gas will fall, if it ever cools dow--I said: "if." Gasoline demand is still rolling and so too are refiners profits. Reuters says that big crude oil margins should boost U.S. refiner earnings. 

About the Author

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