As I mentioned in Saturday's podcast, the silver lining in the recent decline in oil prices is that OPEC+ is now likely to extend the production cuts that they put in place in December.
Headline: Oil Prices Break Losing Streak on Emerging OPEC Consensus Over Output Cut
Investing.com - Oil prices headed higher on Monday after Saudi Arabia’s energy minister Khalid al-Falih indicated that a consensus was emerging between OPEC and allies led by Russia over an extension of the output cut agreement.
Falih insisted that the group was near an agreement to extend their deal, which currently expires at the end of this month, to the second half of the year in an effort to rebalance the market, according to a report from Arab News.
Despite some speculation of a delay until July, OPEC is still scheduled to hold its official meeting on June 25 in Vienna, with non-OPEC ministers expected to join the following day.
“We will do what is needed to sustain market stability beyond June. To me, that means drawing down inventories from their currently elevated levels,” Falih was quoted as saying.
Oil prices which had been declining overnight spiked on the news, breaking a four-day losing streak that drove crude to weekly losses of nearly 9%. New York-traded West Texas Intermediate crude futures was last up 66 cents, or 1.2%, at $54.16 a barrel by 7:23 AM ET (11:23 GMT), while Brent crude futures, the benchmark for oil prices outside the U.S., rose 64 cents, or 1.0%, to $62.63.
Escalating trade tensions between the U.S. and China have pummeled crude prices as investors fear a global recession that would severely hamper demand.
Oil registered its worst monthly performance in six months in May on the back of those concerns, wiping out nearly half of the 2019 rally that was spawned from the production cut agreement began this year along with U.S. sanctions on Iran and Venezuela and several supply disruptions.
In other energy trading, gasoline futures gained 0.2% at $1.7747 a gallon by 7:26 AM ET (11:26 GMT), while heating oil traded up 0.4% at $1.8485 a gallon.
Lastly, natural gas futures traded down 0.7% at $2.437 per million British thermal unit.
Oil Price - June 3
Oil Price - June 3
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price - June 3
DUBAI (Reuters) - Saudi Energy Minister Khalid al-Falih said consensus was emerging among the OPEC+ group of oil producers to continue working towards oil market stability in the second half of the year, the Saudi-owned Arab News newspaper reported on Monday.
Oil prices in May sustained their worst monthly fall in six months on worries that trade disputes would hit demand for crude.
Saudi Arabia produced 9.65 million barrels per day (bpd) of oil in May, a Saudi industry source said, a deeper cut than its target set by the Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+.
The output target of top oil exporter Saudi Arabia under the OPEC+ supply agreement is 10.3 million bpd. In April, the country produced 9.742 million bpd, OPEC data shows. The output cut deal runs until the end of June.
"We will do what is needed to sustain market stability beyond June. To me, that means drawing down inventories from their currently elevated levels," Arab News quoted Falih as saying.
U.S. crude stockpiles fell less than expected last week, data from the Energy Information Administration showed on Thursday. Stocks are near their highest since July 2017 and about 5% above the five-year average.
Feeding bearish market sentiment, the United States and China, the world's two biggest economies, are embroiled in a trade war that has stoked fears of a global economic slowdown which in turn would weigh on oil demand.
But at the same time, U.S. sanctions on OPEC members Venezuela and Iran have slashed their oil exports.
"Increasing trade friction and potential barriers would certainly have a negative impact on the global economy and oil demand growth. But the direction of the negotiations (between the United States and China) is hard to predict," Falih said.
"You can be sure that we will be responsive ... These levels (of volatility) are totally unwarranted in light of both the current market fundamentals, which remain healthy, and the high levels of discipline by OPEC+ producers."
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MY TAKE: By mid-June we should see steady declines in U.S. and OECD crude oil inventories as refiners ramp up to more than 95% capacity to produce gasoline and diesel. Refined product inventories in the U.S. have been falling for the last six weeks (per EIA) as measured by days of supply:
> Gasoline inventories have dropped from 23.9 to 22.0 days of supply. < This is getting dangerously low. Anything below 20 days of supply risks regional shortages.
> Jet fuel inventories have dropped from 24.7 to 21.7 day of supply.
> Distillates inventories have dropped from 33.8 to 31.1 days of supply.
Oil prices in May sustained their worst monthly fall in six months on worries that trade disputes would hit demand for crude.
Saudi Arabia produced 9.65 million barrels per day (bpd) of oil in May, a Saudi industry source said, a deeper cut than its target set by the Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+.
The output target of top oil exporter Saudi Arabia under the OPEC+ supply agreement is 10.3 million bpd. In April, the country produced 9.742 million bpd, OPEC data shows. The output cut deal runs until the end of June.
"We will do what is needed to sustain market stability beyond June. To me, that means drawing down inventories from their currently elevated levels," Arab News quoted Falih as saying.
U.S. crude stockpiles fell less than expected last week, data from the Energy Information Administration showed on Thursday. Stocks are near their highest since July 2017 and about 5% above the five-year average.
Feeding bearish market sentiment, the United States and China, the world's two biggest economies, are embroiled in a trade war that has stoked fears of a global economic slowdown which in turn would weigh on oil demand.
But at the same time, U.S. sanctions on OPEC members Venezuela and Iran have slashed their oil exports.
"Increasing trade friction and potential barriers would certainly have a negative impact on the global economy and oil demand growth. But the direction of the negotiations (between the United States and China) is hard to predict," Falih said.
"You can be sure that we will be responsive ... These levels (of volatility) are totally unwarranted in light of both the current market fundamentals, which remain healthy, and the high levels of discipline by OPEC+ producers."
-----------------------------------
MY TAKE: By mid-June we should see steady declines in U.S. and OECD crude oil inventories as refiners ramp up to more than 95% capacity to produce gasoline and diesel. Refined product inventories in the U.S. have been falling for the last six weeks (per EIA) as measured by days of supply:
> Gasoline inventories have dropped from 23.9 to 22.0 days of supply. < This is getting dangerously low. Anything below 20 days of supply risks regional shortages.
> Jet fuel inventories have dropped from 24.7 to 21.7 day of supply.
> Distillates inventories have dropped from 33.8 to 31.1 days of supply.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price - June 3
Note from John White at Roth Capital dated 6-3-2019:
Another Cruel Summer for Crude Oil? We Don't Think So
We have lowered our projected oil and gas prices for 2H 2019, roughly in line with the current futures markets as shown in detail on page two. In our opinion, the current global risk-off mode in the equity markets is also governing positioning in the WTI crude oil market. In our view, the crude oil markets are overlooking the tightness of the supply and demand balance in the physical market, as shown on page two. The equity markets have turned to a risk-off mode due to continuing concerns related to the Trump tariffs on Chinese goods and threats of more tariffs on Chinese goods, the recent announcement of tariffs on Mexican goods and a handful of disappointing PMIs.
While the magnitude is different, we see a directional pattern of similarity between WTI crude oil and equities in general. Year to date, WTI crude oil saw its low on the first trading day of the year at $46.54/bbl on January 2 then rose 42% to its high of the year at $66.30/bbl on April 23 and has since moved 19% lower to close at $53.50/bbl on May 31. WTI crude oil has averaged $57.97/bbl year to date.
Similarly the SPY, the SPDR S&P 500 ETF, saw its low of $243.67 on January 3 and then climbed 21% to $294.95 and then retreated 7% to close at $275.27 on May 31.
Roth Covered Companies
Mentioned in this Report:
CHAP $4.22 Buy
CPE $6.25 Buy
EPM $6.11 Buy
ESTE $5.47 Buy
FANG $98.06 Buy
GDP $11.57 Buy
LONE $2.75 Buy
MCF $2.14 Neutral
REI $3.54 Buy
SRCI $4.74 Buy
TALO $23.34 Buy
WTI $4.20 Buy
We lowered our oil and gas price forecasts to be more or less in line with the NYMEX futures as this is typical convention in the research community, albeit there are outliers. However, in our view, at least for the short and intermediate term, the crude oil market is not accurately reflecting the potential for supply disruptions, due primarily to ongoing geopolitical risks.
On May 31, Saudi Arabia’s King Salman opened an emergency summit of Arab leaders in Mecca on Friday with a call for the international community to use all means to confront Iran, but he also said the kingdom remains committed to peace. King Salman delivered his remarks at Arab summits in Mecca that were hastily convened after a spike in tensions between Saudi Arabia and its rival Iran. This move is in the wake of the attacks on the four tankers in UAE’s territorial waters and the sabotage of the East-West pipeline in Saudi Arabia earlier in May.
Meanwhile, regarding Iranian exports, the U.S. recently announced it would not renew any waivers on Iranian oil exports when they expired on May 2, 2019 seeking to drive Iran’s oil exports as close to zero as possible. Another critical date is close, as July 7 is the deadline for the EU to try and find an avenue around the sanctions. The loss of further Iranian exports is mitigated longer term by signals from other producers that they will step in to replace Iran’s barrels, albeit gradually in response to requests from customers.
Another supply risk is Venezuela, which posted OPEC’s second biggest month over month production loss in April, declining 40,000 b/d due to U.S. sanctions and the lingering impact of power cuts, according to the IEA. Output of 830,000 b/d was down a stunning 610,000 b/d on a year ago and is a one-third of production at the start of 2016.
Regarding U.S. production growth, with the negative sentiment investors are showing the oil and gas sector, we wouldn't be surprised if the large E&P companies decide to reduce capex in 2H 2019 and increase stock buybacks.
Another Cruel Summer for Crude Oil? We Don't Think So
We have lowered our projected oil and gas prices for 2H 2019, roughly in line with the current futures markets as shown in detail on page two. In our opinion, the current global risk-off mode in the equity markets is also governing positioning in the WTI crude oil market. In our view, the crude oil markets are overlooking the tightness of the supply and demand balance in the physical market, as shown on page two. The equity markets have turned to a risk-off mode due to continuing concerns related to the Trump tariffs on Chinese goods and threats of more tariffs on Chinese goods, the recent announcement of tariffs on Mexican goods and a handful of disappointing PMIs.
While the magnitude is different, we see a directional pattern of similarity between WTI crude oil and equities in general. Year to date, WTI crude oil saw its low on the first trading day of the year at $46.54/bbl on January 2 then rose 42% to its high of the year at $66.30/bbl on April 23 and has since moved 19% lower to close at $53.50/bbl on May 31. WTI crude oil has averaged $57.97/bbl year to date.
Similarly the SPY, the SPDR S&P 500 ETF, saw its low of $243.67 on January 3 and then climbed 21% to $294.95 and then retreated 7% to close at $275.27 on May 31.
Roth Covered Companies
Mentioned in this Report:
CHAP $4.22 Buy
CPE $6.25 Buy
EPM $6.11 Buy
ESTE $5.47 Buy
FANG $98.06 Buy
GDP $11.57 Buy
LONE $2.75 Buy
MCF $2.14 Neutral
REI $3.54 Buy
SRCI $4.74 Buy
TALO $23.34 Buy
WTI $4.20 Buy
We lowered our oil and gas price forecasts to be more or less in line with the NYMEX futures as this is typical convention in the research community, albeit there are outliers. However, in our view, at least for the short and intermediate term, the crude oil market is not accurately reflecting the potential for supply disruptions, due primarily to ongoing geopolitical risks.
On May 31, Saudi Arabia’s King Salman opened an emergency summit of Arab leaders in Mecca on Friday with a call for the international community to use all means to confront Iran, but he also said the kingdom remains committed to peace. King Salman delivered his remarks at Arab summits in Mecca that were hastily convened after a spike in tensions between Saudi Arabia and its rival Iran. This move is in the wake of the attacks on the four tankers in UAE’s territorial waters and the sabotage of the East-West pipeline in Saudi Arabia earlier in May.
Meanwhile, regarding Iranian exports, the U.S. recently announced it would not renew any waivers on Iranian oil exports when they expired on May 2, 2019 seeking to drive Iran’s oil exports as close to zero as possible. Another critical date is close, as July 7 is the deadline for the EU to try and find an avenue around the sanctions. The loss of further Iranian exports is mitigated longer term by signals from other producers that they will step in to replace Iran’s barrels, albeit gradually in response to requests from customers.
Another supply risk is Venezuela, which posted OPEC’s second biggest month over month production loss in April, declining 40,000 b/d due to U.S. sanctions and the lingering impact of power cuts, according to the IEA. Output of 830,000 b/d was down a stunning 610,000 b/d on a year ago and is a one-third of production at the start of 2016.
Regarding U.S. production growth, with the negative sentiment investors are showing the oil and gas sector, we wouldn't be surprised if the large E&P companies decide to reduce capex in 2H 2019 and increase stock buybacks.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group