Tag: OPEC

Oil Prices Tumble Over 5% as Israel Unlikely to Target Iran’s Oil Industry

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Oil futures dropped over 5% as fears of Israeli attacks on Iran’s oil facilities eased.
– Weak demand in China and OPEC’s downward revision of oil forecasts are adding pressure on crude prices.
– The International Energy Agency (IEA) signals a surplus in global oil supply, further dampening the market.

Oil prices fell sharply on Tuesday, dropping more than 5%, as geopolitical concerns surrounding Israel and Iran’s oil industry began to ease. Initially, fears of potential supply disruptions spiked oil prices after Iran launched a missile attack on Israel earlier this month, but the market has now calmed as Israel is not expected to strike Iran’s oil infrastructure.

At the same time, the International Energy Agency (IEA) has weighed in, signaling that its member nations are prepared to take action if any supply disruption occurs in the Middle East. For now, however, global oil supply remains steady, and with the absence of major disruptions, the market faces a likely surplus in the new year.

As of Tuesday morning, energy prices were reacting to both the geopolitical environment and broader market dynamics:

  • West Texas Intermediate (WTI) November futures fell by $3.74, or 5.07%, to $70.08 per barrel. Year to date, U.S. crude oil has seen a 2% decline.
  • Brent crude, the global benchmark, fell by $3.67, or 4.7%, to $73.79 per barrel, continuing its year-to-date drop of about 4%.
  • Gasoline prices also dipped, with the November contract down 4.47% to $2.014 per gallon, bringing year-to-date losses to nearly 4%.
  • Natural gas was the exception, seeing a slight rise of 1.36% to $2.528 per thousand cubic feet.

The significant drop in crude prices reflects more than just geopolitics. The oil market has been facing weakening demand, particularly from China, and ongoing concerns about a global economic slowdown. OPEC’s recent decision to cut its 2024 oil demand forecast for the third consecutive month has further contributed to the pressure on oil prices.

China’s oil consumption has been particularly weak in recent months, with the IEA reporting that Chinese demand dropped by 500,000 barrels per day (bpd) in August. This marked the fourth consecutive monthly decline, adding to the overall bearish sentiment surrounding global oil demand.

The broader outlook for 2024 and 2025 also suggests slower demand growth compared to the post-pandemic recovery. The IEA projects global oil demand to increase by just under 900,000 bpd in 2024 and 1 million bpd in 2025, which is a noticeable drop from the 2 million bpd growth seen in the previous years.

At the same time, crude production in the Americas, particularly the U.S., is on track to grow. According to the IEA, American-led production will increase by 1.5 million bpd this year and next, further contributing to the global supply glut.

For the third consecutive month, OPEC has revised its oil demand forecast downward, reflecting concerns about slower economic growth and subdued consumption in major markets like China. The cuts come as the cartel faces pressure to balance supply with softer global demand.

As a result of these factors, analysts now expect the oil market to shift its focus away from geopolitical fears and towards demand weakness, which could define the market’s trajectory in the months ahead. While geopolitical events may continue to inject short-term volatility, the more significant concern remains the fundamental imbalance between supply and demand.

Oil Surges as US Warns of Potential Iran Attack on Israel, Stoking Fears of Supply Disruption

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Oil prices jump 4% as Iran reportedly prepares to strike Israel within hours.
– Middle East tensions raise concerns about global oil supply, pushing prices higher.
– Investors brace for volatility amid potential disruptions in one of the world’s largest oil-producing regions.

Oil prices surged on Tuesday following warnings from the US that Iran is preparing to launch an attack on Israel within the next 12 hours. This development has significantly heightened concerns over possible disruptions to oil supplies in the Middle East, a region that produces a third of the world’s crude oil.

West Texas Intermediate (WTI) crude saw an immediate increase of nearly 4%, reaching close to $71 a barrel, while Brent crude, the global benchmark, climbed above $74. The potential conflict in this geopolitically critical area may lead to further price hikes if tensions escalate and oil output is impacted. Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), was the ninth-largest oil producer in 2023, pumping over 3.3 million barrels a day as recently as August.

“The key factor for crude will be whether Israeli defense systems are able to shield against the attack and what subsequent actions Israel might take,” said Rebecca Babin, senior energy trader at CIBC Private Wealth. “In the near term, we could see a few more dollars of short covering in crude.”

This possible disruption marks the most significant threat to oil markets since Russia’s invasion of Ukraine, an event that sent global markets into turmoil last year. Surging oil prices are likely to become a significant concern for consumers and governments, especially in countries like the US where gasoline prices are a political flashpoint. Both major presidential candidates are expected to focus on preventing a further spike in gas prices, with the cost of oil playing a central role in domestic economic debates.

The geopolitical threat comes at a time when oil traders had been betting heavily on bearish market trends, largely driven by concerns of weakening demand growth. The elevated short positions have left the market vulnerable to sharp upward movements if these bearish bets need to be unwound quickly in response to rising tensions in the Middle East.

Concerns about the Middle East have been escalating following the death of Hezbollah leader Hassan Nasrallah last week. In retaliation, Israel has launched airstrikes on Beirut and initiated “targeted ground raids.” As the region braces for further conflict, investors are anticipating potential volatility in the oil market, with Brent crude volatility indices reaching their highest levels since January.

Previously, oil prices had dropped in recent months amid expectations that OPEC+ would increase production just as non-OPEC nations, including the US, ramped up their output. Additionally, China’s weakening demand, as the world’s largest crude importer, has added downward pressure on prices. However, this latest geopolitical flare-up could reverse these trends, injecting fresh instability into global energy markets.

As investors brace for further developments, the oil market remains on edge, with any direct involvement from Iran likely to further disrupt global supplies and drive prices higher.

Oil Prices Surge Amid Hopes for Rate Cuts and Inflation Data

Posted on by slightbourne@noblecapitalmarkets.com

In a surprising turn of events, oil prices have climbed for the second consecutive session, with Brent crude settling above $85 per barrel. This uptick comes as hopes for U.S. interest rate cuts were fueled by an unexpected slowdown in inflation. The market’s reaction to these economic indicators highlights the intricate connections between macroeconomic factors and commodity prices.

The latest data from the U.S. Bureau of Labor Statistics revealed a decline in consumer prices for June. This unexpected drop has boosted expectations that the Federal Reserve might cut interest rates sooner than anticipated. Following the release of the inflation data, traders saw an 89% chance of a rate cut in September, up from 73% the day before. Slowing inflation and potential rate cuts are expected to spur more economic activity. Analysts from Growmark Energy have noted that such measures could bolster economic growth, subsequently increasing demand for oil.

Federal Reserve Chair Jerome Powell acknowledged the recent improvements in price pressures but stressed to lawmakers that more data is needed to justify interest rate cuts. His cautious approach underscores the Fed’s commitment to data-driven policy decisions. The possibility of rate cuts also impacted the U.S. dollar index, causing it to drop. A weaker dollar generally supports oil prices by making dollar-denominated commodities cheaper for buyers using other currencies. Gary Cunningham, director of market research at Tradition Energy, emphasized this point, noting that a softer dollar could enhance oil demand.

The rise in oil prices also reflects broader market dynamics. On Wednesday, U.S. data showed a draw in crude stocks and strong demand for gasoline and jet fuel, ending a three-day losing streak for oil prices. Additionally, front-month U.S. crude futures recorded their steepest premium to the next-month contract since April. This market structure, known as backwardation, indicates supply tightness. When market participants are willing to pay a premium for earlier delivery dates, it often signals that current supply isn’t meeting demand.

While current market conditions suggest strong demand, future demand forecasts from major industry players show significant divergence. The International Energy Agency (IEA) recently predicted global oil demand growth to slow to under a million barrels per day (bpd) this year and next, mainly due to reduced consumption in China. In contrast, the Organization of the Petroleum Exporting Countries (OPEC) maintained a more optimistic outlook, forecasting world oil demand growth at 2.25 million bpd this year and 1.85 million bpd next year. This discrepancy between the IEA and OPEC forecasts is partly due to differing views on the pace of the global transition to cleaner fuels.

Alex Hodes, an analyst at StoneX, noted that the divergence in demand forecasts is unusually wide, attributing it to varying opinions on how quickly the world will shift to cleaner energy sources. This uncertainty adds another layer of complexity to market predictions and planning.

The interplay between inflation data, interest rate expectations, and oil demand forecasts creates a nuanced picture for the future of oil prices. If the Federal Reserve proceeds with rate cuts, increased economic activity could boost oil demand. However, the ongoing transition to clean energy and geopolitical factors will continue to play crucial roles. For now, market participants and analysts will closely monitor economic indicators and policy decisions. The recent rise in oil prices highlights the market’s sensitivity to macroeconomic trends and the importance of timely and accurate data in shaping market expectations.

These recent movements in oil prices underscore the complex interdependencies between economic data, policy decisions, and market dynamics. As inflation shows signs of cooling and hopes for rate cuts grow, the oil market is poised for potentially significant shifts. Understanding these trends is crucial for stakeholders across the industry as they navigate the evolving landscape of global energy markets.

Oil Prices Spike as Middle East Conflict Reignites Supply Fears

Posted on by slightbourne@noblecapitalmarkets.com

Escalating hostilities between Israel and Iran have injected a new wave of supply disruption fears into global oil markets, sending crude prices surging to multi-month highs. The flareup threatens to further tighten supplies at a time when producers already appear maxed out, setting the stage for another potential energy price shock.

Crude benchmarks spiked over $90 a barrel in overnight trading after Israeli missiles struck Iran overnight. The attack came in retaliation for an Iranian drone and missile barrage targeting Israel just days earlier. While Iran has downplayed the impact so far, the tit-for-tat actions raised the specter of a broader military conflict that could imperil energy shipments throughout the Middle East.

Front-month Brent futures, the global pricing benchmark, jumped as high as $92 per barrel before paring gains. U.S. West Texas Intermediate crude topped $89 per barrel. Though off their overnight peaks, both contracts remained up over 2% on the day, hitting levels not seen since late 2023.

The aerial attacks have put the market on edge over the potential for supply chokeholds out of the Persian Gulf. Any protracted disruptions in that key oil shipping chokepoint would severely crimp available exports to global markets from regional producers like Saudi Arabia, Iran, and Iraq.

With the oil market already grappling with reduced supply from Russia due to sanctions, as well as chronic underinvestment by drillers, even modest additional shortfalls could quickly drain limited spare capacity buffers. OPEC and its allies have struggled to boost output to offset losses amid the broader underinvestment cycle.

For consumers still reeling from high energy costs, another bullish jolt to oil prices is an unwelcome development. After pulling back from 2022’s dizzying peaks, U.S. gasoline prices have started rebounding in recent weeks. The current $3.67 per gallon national average is up 21 cents just over the past month, according to AAA.

Some of that increase was expected due to seasonal refinery maintenance impacts. But the renewed geopolitical turmoil could propel gasoline and other fuel prices significantly higher nationwide if the conflict engulfing Israel and Iran deteriorates further.

The energy spike compounds existing inflationary headwinds plaguing the global economy. From restricted supplies of grains and fertilizers to manufacturing disruptions, the shockwaves from Russia’s invasion of Ukraine continue to ripple far and wide over a year later. Rapidly escalating tensions in the Middle East risk aggravating those pressures at a time when central banks are still struggling to restore price stability.

While some of the risk premium prompted by the Israel-Iran conflict may already be priced into crude, the threat of escalating retaliatory actions between the two adversaries keeps bullish risks elevated. Additional supply hits to global markets from further hostilities could easily drive oil prices back towards triple-digit territory not seen since 2022.

On Wall Street, stock futures were initially rattled by the rising geopolitical tensions, though markets stabilized in early trading as Iran refrained from immediate retaliation. Still, the volatility injected reinforces the nebulous risks confronting investors from the ever-simmering Middle East powder keg.

With so much at stake for inflation outlooks, policymakers at the Federal Reserve and other central banks will be monitoring the region with hawkish vigilance. Though diplomatically challenging to resolve, an extended sectarian conflict jeopardizing the secure flow of oil could compel another crusade of aggressive interest rate hikes historically anathema to financial markets.

For both consumers and investors, the situation serves as a stark reminder that geopolitical shocks exposing vulnerabilities in tight energy markets remain an omnipresent threat overhanging the economic outlook. Whether this clash proves fleeting or portends protracted hostilities remains to be seen, but the reverberations have oil prices surging once again.

Oil Heads for First Annual Decline Since 2020 as Oversupply Weighs

Posted on by slightbourne@noblecapitalmarkets.com

Oil prices are on pace to decline around 10% in 2022, which would mark the first annual drop since the pandemic-driven crash of 2020. After a volatile year, bearish sentiment has taken hold in oil markets amid fears that surging production outside OPEC will lead to an oversupplied market.

With the global economy slowing, especially in key consumer China, demand growth is stalling. Meanwhile, output has hit new highs in the United States, Brazil, Guyana and other non-OPEC countries. This perfect storm of sluggish demand and robust non-OPEC supply has tipped the balance into surplus, putting downward pressure on prices.

West Texas Intermediate futures are trading near $72 per barrel, down from over $120 in June. The international Brent benchmark is hovering under $78, having fallen from summertime highs over $130. Despite ongoing risks, including escalating Iran-related tensions in the Middle East, oil is poised to post its first yearly decline since the Covid crisis cratered prices in 2020.

Supply Surge Outside OPEC Upsets Market Balance

Much of the extra crude swamping the market is coming from the United States. American oil output averaged 13.3 million barrels per day last week, a record high. Exceptional production growth is also happening in Brazil, Guyana, Canada and other countries.

The International Energy Agency expects this non-OPEC supply surge to continue, forecasting growth of 1.2 million barrels per day next year. That will more than satisfy the world’s modest demand growth projected at 1.1 million barrels per day in the IEA’s base case scenario.

With non-OPEC, and chiefly U.S. shale, filling demand, OPEC and its allies have lost their traditional grip on balancing the market. Despite cutting output targets substantially, OPEC+ efforts to lift prices seem futile.

Traders anticipate more discipline will be required to bring inventories down. But further significant cuts could simply provide more space for American drillers to increase production, replacing any barrels OPEC removes.

Tepid Demand Outlook Adds to Gloomy Price Forecast

On top of the supply influx, oil bulls are also contending with a deteriorating demand environment. High inflation, rising interest rates, and frequent Covid outbreaks have slowed China’s economy significantly.

With Chinese oil consumption dropping, global demand growth is expected to decelerate in 2024. Major financial institutions like Morgan Stanley see demand expanding at less than 1 million barrels per day. That’s about half the pace forecast for 2023.

Other major economies in Europe and North America are also wobbling, further dampening the demand outlook. Less robust consumption, together with the supply deluge, points to a market remaining oversupplied through next year.

In futures markets, bearish sentiment has sunk in. Both WTI and Brent futures point to prices averaging around $80 per barrel in 2023, barring a major geopolitical disruption. That would cement the first back-to-back years of oil price declines since 2015-2016.

Wildcard Risks – Can Middle East Tensions Shift Momentum?

As oversupply dominates, the greatest upside risk to prices may be conflict-driven outages that take substantial oil capacity offline. Heightened tensions between Iran and the West pose this type of wildcard geopolitical threat.

Recent attacks on oil tankers near the Strait of Hormuz and Arabian Sea occurred after the U.S. killed an Iranian commander. Iran-backed Houthi rebels in Yemen also launched missiles and drones at facilities in Saudi Arabia.

While no significant disruptions have occurred so far, direct hostilities between Iran and the U.S. or its allies could sparks clashes endangering Middle East output. Iran has threatened to blockade the Strait of Hormuz, which handles a fifth of global oil trade. Any major loss of supply through this chokepoint could upend the bearish outlook.

For now, however, the market remains fixated on bulging inventories and the supply free-for-all outside OPEC. As the world undergoes a historic shift in oil production geography, the industry faces a reckoning over whether unchecked growth risks unsustainably low prices. If the supply surge continues outpacing demand, today’s pessimism over prices could last well beyond 2024.

Take a look at more emerging growth energy companies by taking a look at Noble Capital Markets’ Senior Research Analyst Michael Heim’s coverage universe.

Oil Prices Plunge As OPEC+ Delays Key Output Decision

Posted on by slightbourne@noblecapitalmarkets.com

Oil markets were thrown into turmoil on Wednesday after the OPEC+ alliance unexpectedly postponed a critical meeting to determine production levels. Prices promptly plunged over 5% as hopes for additional output cuts to stabilize crude markets were dashed, at least temporarily.

The closely-watched meeting was originally slated for December 3-4. But OPEC+, which includes the 13 member countries of the Organization of Petroleum Exporting Countries along with Russia and other non-members, said the summit would now take place on December 6 instead, offering no explanation for the delay.

The last-minute postponement fueled speculation that the group is struggling to build consensus around boosting production cuts aimed at reversing oil’s steep two-month slide. Disagreements apparently center on Saudi dissatisfaction with other nations flouting their output quotas. Compliance has emerged as a major flashpoint as oil revenue pressures intensify amid rising recession fears.

Prices Rally on Cut Hopes

In recent weeks, oil had rebounded from mid-October lows on mounting expectations that OPEC+ would intervene to tighten supply and put a floor under prices once more.

The alliance has already removed over 5 million barrels per day since 2023 through unilateral Saudi production cuts and collective OPEC+ reductions. But crude has continued drifting lower, with Brent plunging below $80 per barrel last week for the first time since January.

Demand outlooks have deteriorated significantly, especially in China where crude imports fell in October to their lowest since 2007. At the same time, releases from strategic petroleum reserves and resilient non-OPEC production have expanded inventories, exacerbating the supply glut.

Output Quotas Trigger Internal Rifts

Energy analysts widely anticipate that OPEC+ will finalize plans at next week’s rescheduled talks to extend existing production cuts until mid-2024. Saudi Arabia and Russia, the alliance’s de factor leaders, both support additional trims.

However, firming up commitments from the broader group may prove challenging. Crude exports are critical to the economies of many member nations. With government budgets squeezed by weakened prices, some countries have little incentive to curb production.

Unconfirmed reports suggest that Saudi Arabia demanded Iraq and several other laggards bolster compliance with quotas before it agrees to further output reductions. But getting all parties in line with their assigned targets has long confounded the alliance.

Where Oil Goes Next

For now, oil markets are in limbo awaiting next Thursday’s OPEC+ gathering. Prices could see added volatility until the cartel unveils its plans.

Most analysts still expect that additional cuts will emerge, possibly in the 500,000 barrels per day range. That may be enough to place a temporary floor under the market and keep Brent crude from approaching $70 per barrel.

But if internal dissent paralyzes OPEC+ from reaching an agreement, or one that falls significantly short of projections, another downward spiral is probable. Pressure would only escalate on the alliance to take more drastic actions to stabilize prices in 2024 as economic storm clouds gather.

Four Reasons Oil Prices Could Gain Upward Momentum

Posted on by phoffman@channelchek.com
Image Credit: Phillip Pessar (Image Credit)

The Odds May Again be Stacked on the Side of a Prolonged Oil Price Rally

Oil markets and the related energy industry have been cheered this year as the one clear winner, yet within the past few days, crude has brushed up against its low recorded at the start of 2022. The commodity has since bounced, and there are at least four reasons to believe that it will continue to rally.

On Wednesday, November 30, news that China will take steps to ease lockdown restrictions, a drop in U.S. oil supplies, a weaker U.S. dollar, and a signal of OPEC+’s intentions helped push crude prices up by more than 3.5%.

China

Major Chinese manufacturing cities are lifting Covid lockdowns, including the financial hub Shanghai and Zhengzhou (the location of the world’s largest iPhone factory). Renewed expectations that China’s economy may strengthen after being held back by restrictions on movement to contain Covid-19 helped lift prices. After lockdown protests last weekend, Chinese authorities reported fewer cases of the virus on Tuesday. Guangzhou, a city in the south of the country, relaxed some rules on Wednesday. Increased economic activity in China could come at a pace that dramatically increases the demand for oil and related products.

US Supply

U.S. petroleum stockpiles declined by 7.9 million barrels last week, according to reports from the American Petroleum Institute. Official figures from the U.S. Energy Information Administration (EIA) shown below indicate a declining trend that is unsustainable and will soon need to be turned around.

Source: EIA

The decline in the days supply is effectively borrowing against future stockpiles as there will need to be a time when this reverses, and more output-increasing stockpiles will add to demand on production.

U.S. Dollar

A weakening dollar has also helped enhance demand globally for crude by making contracts priced in the U.S. currency more affordable for overseas buyers. The dollar index, a measure of strength against a basket of six other major trading currencies, slipped 0.3% on Wednesday. It’s down about 5% in the past month.

While the effect of this FX change may not be felt by U.S. buyers, the added demand by requiring less local currency to translate into dollars effectively creates demand by virtue of its lower cost.

Source: Koyfin

OPEC+

The Saudis had been considering increasing their output to help soften price pressures and increase availability. This would occur when the cartel meets this weekend to decide output levels. It is reported that the meeting will not be in-person. When OPEC+ agrees to meet virtually, it tends to indicate they are not discussing any major changes to output targets.

Expectations of an increase in output had been built into the price; the new expectations are putting upward pressure on crude.

 Take Away

A number of factors have caused crude to trade off since late Spring. A number of forces are now stacked up that could push crude levels back upward. These include fewer lockdowns in China, a declining U.S. supply, the added global demand that will be attracted by a weakening dollar, and the new realization that members of OPEC+ are not likely to increase output limits. Additionally, there has been a looming concern as to how much supply will be taken offline with price limits that are to be placed on purchases of Russian oil early next week.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.marketwatch.com/articles/oil-demand-dollar-china-crude-51669810965?mod=markets

https://oilprice.com/Energy/Crude-Oil/Source-Dont-Expect-Any-Oil-Supply-Surprises-From-The-Sunday-OPEC-Meeting.html

https://www.eia.gov/petroleum/weekly/crude.php

Has Saudi Arabia Become Europe’s Secret Santa?

Posted on by phoffman@channelchek.com
Image Credit: Gunter Henschel (Flickr)

Europe May Be Saved from the December Planned Oil Embargo in a Nick of Time

On December 5, the European Union plans to cap oil prices at levels where EU nations would then be permitted to buy oil from Russia. This would significantly reduce the petroleum supply of the region going into winter. The day before this goes into effect, (December 4), OPEC+ will meet to set output levels. Saudi Arabia and other OPEC producers are expected to discuss an output increase, according to emissaries from the group. The 11th hour move could keep much needed petroleum flowing into the region at a time that weather-related demand would naturally grow, holiday driving would be expected to increase, and war-related strategies would have reduced oil coming out of Russia. While western news has verified their sources as actual delegates of OPEC+, the Saudi’s are now saying that their plans are always secret.  

About the New Expectations

A production increase of up to 500,000 barrels a day is now expected to be the discussion at OPEC+’s December 4 meeting, delegates said. Any output increase would mark a partial reversal of a controversial decision last month to cut production by 2 million barrels a day. This was agreed upon at the most recent meeting of the Organization of the Petroleum Exporting Countries and their Russia-led allies, a group known collectively as OPEC+.

The White House had said the production cut undermined global efforts to negatively impact Russia’s war in Ukraine. Saudi-U.S. relations have hit a low point over oil-production disagreements this year; if the December 4 OPEC+ meeting leads to increased oil, this may warm the cooled Saudi-U.S. relations.  

About the EU December 5th Plan

The European Union has agreed to stop all oil imports from Russia on December 5. The plan is to cap the prices at which EU nations would buy oil from Russia, that price is expected to be near $60 per barrel. Russia has reacted by increasing exports to Asia, but the price cap is expected to reduce its exports and lower total supply by up to one million barrels per day.

About the OPEC+ December 4th Expectations

A production increase of up to 500,000 barrels a day is now under discussion for OPEC+’s December 4 meeting, emissaries said.

Any increase in OPEC+ output will partially undo the decision made at OPEC+’s its last monthly meeting. In October the cartel voted to cut production by 2 million barrels per day. The decision by the Organization of the Petroleum Exporting Countries and their Russia-led allies, (OPEC+) was a disappointment to the White House and NATO nations that saw reduced production as strengthening Russia’s ability to fund its war with higher priced exports.  

Under normal production discussions by OPEC+ production increases, with oil prices falling more than 10% since the first week of November, one might not expect an increase. Brent crude traded at about $87 a barrel on Monday, while WTI, the U.S. benchmark, fell below $80 a barrel for the first time since September. Production increases could cause prices to fall further.  

Emissaries say, a production increase would be to respond to expectations that oil consumption will rise in the winter. Oil demand is expected to increase by 1.69 million barrels a day to 101.3 million barrels a day in the first quarter next year, compared with the average level in 2022.

OPEC and its allies say they have been carefully studying the G-7 plans to impose a price cap on Russian oil, conceding privately that they see any such move by crude consumers to control the market as a threat. Russia has said it wouldn’t sell oil to any country participating in the price cap, potentially resulting in another effective production cut from Moscow—one of the world’s top three oil producers.

Source: Koyfin

What Else?

Raising oil production ahead of the December 5 EU embargo would give the Saudis another argument that they are acting in their own interests, and not is support of Russia’s.

Talk of the production increase emerged after the Biden administration told a federal court judge that Saudi Crown Prince Mohammed bin Salman should have sovereign immunity from a U.S. federal lawsuit related to the killing of Saudi journalist Jamal Khashoggi. The immunity decision is seen by some as a concession to Prince Mohammed, and heighten his standing as the kingdom’s de facto ruler. The move comes after the Biden administration tried for months to isolate him.

Another factor that helps account for the timing of OPEC+’s discussion to raise output is the two large OPEC members, Iraq and the United Arab Emirates that want to pump more oil. Both countries are pushing the oil-producing nations to allow them a higher daily-production ceiling, which would lead to more oil produced globally.

Saudi officials late Monday denied reports the kingdom is reversing course and helping the West with added production.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.wsj.com/articles/saudi-arabia-eyes-opec-production-increase-ahead-of-embargo-price-cap-on-russian-oil-11669040336

https://finance.yahoo.com/news/oil-sinks-china-struggle-covid-024416236.html

https://www.reuters.com/business/energy/saudi-arabia-eyes-opec-production-increase-wsj-2022-11-21/

Oil Market Drivers Attract Historic Bullish Positions

Posted on by phoffman@channelchek.com
Image Credit: Kurayba (Flickr)

Factors Still Point to Higher Oil Prices and Sizeable Bets on Crude

There are many factors impacting why traditional energy prices and producers may have a hurricane-force tailwind heading into the holidays and next year.

A boost in demand for oil is expected as China just announced that it is lowering its quarantine requirements for visitors from outside the country. But Chinese Covid policies aren’t the only impetus pushing up oil demand – around the globe, there are supply challenges that are playing out. Oil hasn’t risen above $100 a barrel since early Summer, some traders are speculating it will rise above $200 in the coming months. Here’s why.

China

In addition to the announcement that the CPR was cutting the required quarantine period for the country (to five days from seven, with three days of home isolation), the required PCR test hurdle is being lowered as well. And airlines no longer run the risk of being suspended if the travelers they bring in that test positive is five or more.

Europe

The European Union has agreed to stop all oil imports from Russia on Dec. 5. The plan is to cap the prices at which EU nations would buy oil from Russia, that price is expected to be near $60 per barrel. Russia has reacted by increasing exports to Asia, but the price cap is expected to reduce its exports and lower total supply by up to one million barrels per day.

United States

Back in May, the U.S. took the drastic step of increasing available supply by selling oil from the U.S. Strategic Petroleum Reserve at a rate of nearly one million barrels per day starting in May. The increased supply has kept oil prices down. But the sales are unsustainable and expected to be reduced. Congress has allowed another sale of 26 million barrels that are expected to carry through to October 2023. This is a much slower pace of oil releases from the reserves. Plus, the reserves will need to be replenished.

After the Congressionally approved release, the reserve will be down to 348 million barrels, this is half the quantity compared to January of this year —the lowest since 1983. Congress has said that the reserve must stay above 252.4 million barrels, and the incoming Congress is expected to be more conservative when it comes to using these strategic assets to control prices.

Production growth overall in the U.S. has stalled after having increased through most of the year. Government data show that U.S. production dropped to 11.9 million barrels per day last week, this is tied for the lowest level in several months. Supplies of products such as diesel and heating oil in the U.S. are at multiyear lows. So there is not abundant supply should a weather-related or some other fuel-demanding crisis surface.

Source: Koyfin

Prices

Oil is now trading between $92 and $93 a barrel. It had reached a high above $130 in March, shortly after the war began, and hasn’t seen the $100 a barrel level since late June.

Trading this week showed significant flows into an options contract that speculates that $200 per barrel may be in store. The most actively traded Brent crude options contract on Thursday was an option to buy Brent at $200 in March 2023. This was the most active oil contract of the day.

How significant is this bullish activity surrounding oil prices? The ratio of bullish to bearish bets in the options market is wider than at any time in recorded history, according to Bloomberg. Oil options traders are positioned more aggressively than ever before.

Take Away

Oil demand could rise soon in China as travel restrictions are lessened. Elsewhere in the world, oil demand is expected to increase as supplies remain the same or decrease. Demand remained elevated globally despite slower economies.

With supply likely to drop and demand ramping up, $200 by the third week in March is one price expectation for a record number of trades transacted at recently. More than doubling in a few months sounds unthinkable, but the massive trades were transacted by experienced institutional traders.

Paul Hoffman

Managing Editor, Channelchek

The Next Few Months for Oil May be the Most Volatile Yet

Posted on by phoffman@channelchek.com
Image Credit: JoeCabby2011 (Flickr)

How the U.S. and its Allies Plan to Put the Squeeze on Russian Oil Profits

Volatility in oil prices this week has been extreme, even by the standards already set this decade. The price of WTI rose nearly 5% just today. The month ahead promises to create even more volatility as Saudi Arabia just cut prices to Asia; meanwhile, the US and its allies have agreed to put a cap on Russian oil. Details on many of these influences have not yet been worked out or announced. What is known is that the price cap and other sanctions against Russia begin in one month. The commodity trading days leading to the planned December 5 start date and the weeks that follow ought to create a great deal of speculation and price movement. Here is what we do know the allies have agreed upon.

The Cap Map

Sales of Russian oil to the participating countries will be subject to a price cap. The cap pertains to the initial purchase of a load of seaborne Russian oil. The agreement settled by the US and its allies doesn’t subject any subsequent sale of crude as falling under the same cap. The cost of transporting Russian oil is not included in the calculation of the cap. However, these rules only apply once the load of oil makes land. Out at sea, the rules are different.

Source: Koyfin

Trades of Russian oil that occur once the load is at sea are expected to still fall under the cap. However, if the Russia-originated oil has been refined into products such as diesel or gasoline, then it is not subject to the cap.

Restrictions and Jurisdictions

Under the expected price-cap plan, the Group of Seven and Australia are planning to restrict firms in their countries from providing insurance and other key maritime services for any Russian oil shipment unless the oil is sold below a set price. Because much of the world’s maritime services are based in G-7 countries and the European Union, the Western partners are aiming to effectively dictate the price at which Russia can sell some of its oil on global markets.

The Precise Price

The US and its allies have yet to set the price for the scheme, but they expect to define the level or range well before the December 5 implementation date. The slow pace of finalizing the plan have left some oil-market participants concerned that shipments of Russian oil at sea on December 5 could face the cap restrictions. The US Treasury Department, earlier this week, has clarified how this would be determined. The agreement rules that Russian oil shipped before December 5 would be exempt from the cap if it is unloaded at its destination by January 19.

It’s expected the price cap would not bring a crushing blow to banks, insurers, shippers, and traders that help make Russian oil available on global markets. The goal is to cut into the profits Russia earns from its oil sales, the hope by participants is to keep global markets supplied with Russian oil and keep energy prices steady.

The precise price is unknown, however a price range in the mid-60s has been discussed as the possible cap range, as it represents levels in line with where Russian oil had traded before the big run-up.

What Else?

Officials speaking for Russia have threatened to cut their oil production in retaliation for any price cap. It remains seen whether this game of each party partaking in ugly medicine for the survival of both will play out in unexpected ways.  

The plan for the price cap for Russian crude will go into effect on December 5, while two separate price limits for refined Russian petroleum products will kick in on February 5.

Expect volatility in oil prices, leading up to and after the caps go into effect. At the same time, expect the unexpected as it relates to energy.

Paul Hoffman

Managing Editor, Channelchek

https://oilprice.com/Latest-Energy-News/World-News/The-G7-Will-Set-A-Fixed-Price-On-Russian-Oil.html

https://oilprice.com/Latest-Energy-News/World-News/Saudi-Arabia-Cuts-Oil-Prices-For-Asia.html

https://www.wsj.com/articles/u-s-allies-set-parameters-for-price-cap-on-russian-oil-11667554203?mod=Searchresults_pos1&page=1

https://oilprice.com/Energy/Energy-General/Oil-Prices-Rise-As-Bullish-Sentiment-Builds.html

https://www.aa.com.tr/en/energy/oil/oil-prices-show-over-3-rise-in-week-ending-nov-4/36809

Oil Prices, Politics, and Dollar Strength

Posted on by phoffman@channelchek.com
Image Credit: SETShots (Flickr)

Did OPEC+ Undermine US Strategic Reserve Efforts?

The Organization of Petroleum Exporting Countries (OPEC) and the extended Russia-led allies )making it OPEC+) just agreed to slash two million barrels a day from the global petroleum markets. This is likely to nudge the cost of energy up around the globe. Oil and gas had been trending down in the U.S. in part the result of President Biden’s authorized release of one million barrels a day into the market from the U.S. Strategic Petroleum Reserve back in March.

The move by OPEC+, which counteracts efforts in the U.S. to bring prices down, should have the effect of pushing up global energy prices and benefiting oil-exporting countries such as Russia increase revenue per barrel.  

The Russian-Ukraine war has had an impact on crude prices since Russia is a major exporter of the commodity.  Prices in the futures market have been falling since June, and are currently near their pre-war levels. The softening in the market price may not be a function of supply, writes Michael Heim, CFA, Senior Research Analyst, at Noble Capital Markets, in his quarterly Energy Industry Report. Heim says they believe, “…recent weakness largely reflects demand concerns and foreign currency changes but is not a condition of oversupply.” Explaining the connection between dollar strength and oil, Heim added, “Historically, oil prices are lower when the dollar is stronger. This is because most oil suppliers, including international suppliers, demand payments in dollars.”

WTI prices peaked at $120 per barrel in the first week of June. According to Heim, since the peak, they have come down as a “response to signs of a global economic slowdown as governments raise interest rates to fight inflation.” Oil on the futures market is down nearly 50% from its 2022 peak.  

Oil Prices and Politics

OPEC+ has said they are seeking to prevent price swings rather than to target a particular oil price. Benchmark Brent crude is trading at $92 per barrel after the announcement. “The decision is technical, not political,” United Arab Emirates Energy Minister Suhail al-Mazroui told reporters ahead of the meeting.

The actions announced by OPEC+ may cause the NOPEC Bill (No Oil Producing and Exporting Cartels)    that passed the Senate Judiciary Committee back in May to resurface and gain traction. The bipartisan NOPEC bill would change U.S. antitrust law to revoke the sovereign immunity that has long protected OPEC and its national oil companies from lawsuits. Under the Bill, the U.S. attorney general would have the ability to sue the oil cartel or its members, in federal court.

The West has accused Russia of weaponizing energy and orchestrating a crisis in Europe that could trigger rationing power this winter with the potential for gas shortages. This has become a hot issue with humanitarian implications that may help the West paint cartel members in a less than flattering or even adversarial light. While the West is busy accusing Russia of using energy exports in inappropriate ways, Moscow has accused the U.S. and it allies of weaponizing the dollar and financial systems such as SWIFT in retaliation for Russia sending troops into Ukraine in February. SWIFT is a method the U.S. Treasury uses to sanction international suppliers of Russian companies.

While Saudi Arabia has not condemned Moscow’s actions in Ukraine, U.S. officials have said part of the reason Washington wants lower oil prices is to deprive Moscow of oil revenue.

Take Away

Oil will continue to be an interesting sector. The variables impacting price, which have an impact on the broader energy sector include a slowing global economy, ability, and willingness for countries such as the U.S. to tap oil reserves, length of time the Russia and Ukraine war is prolonged, rigs put online, OPEC’s ability to produce at levels targeted, and dollar strength which increases energy costs for those whose native currency is weaker than U.S. petrodollars.

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Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.grassley.senate.gov/news/news-releases/judiciary-committee-advances-grassleys-bipartisan-nopec-act

https://www.channelchek.com/news-channel/energy-industry-report-oil-prices-have-fallen-but-its-not-because-of-supply

https://www.wsj.com/articles/opec-agrees-to-biggest-oil-production-cut-since-start-of-pandemic-11664978144?mod=djem_EnergyJournal

https://www.reuters.com/business/energy/opec-heads-deep-supply-cuts-clash-with-us-2022-10-04/

https://home.treasury.gov/news/press-releases/jy0981