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OPEC ON TAP. The Energy Report
By: Phil Flynn | August 3, 2022

Today is the day we are going to find out for certain whether Biden’s trip to the Middle East and his fist bump with Saudi Crown Prince bin Salman will bear fruit or oil. He used a lot of political capital engaging Saudi Arabia in the hopes that they would raise oil production. Today we’re going to find out if it worked.

Oil prices are weak on concerns about slowing global growth and worries that OPEC Plus might surprise the market and add a few extra barrels. Yet reports show from at least three OPEC plus sources that there is very little chance for an oil output increase at today’s meeting. We did hear one source from Kazakhstan that said that OPEC plus may need to raise oil production to meet demand so there is a little speculation that there might be a few extra barrels let out. Now reports are saying that it is highly likely that OPEC will consider a modest increase of production, but that increase will likely be below 400,000 barrels a day.

Whatever they do more than likely won’t be enough oil to ease the global tightness of supply. In fact according to Reuters OPEC says that, “Demand for oil is expected to continue its recovery, albeit, at a slower pace than earlier this year and last year, the secretary general of the Organization of Petroleum Exporting Countries told Algerian state television ahead of Wednesday’s OPEC+ meeting. “We are still seeing increased demand for oil… compared to the period of the COVID-19 pandemic in 2020 and 2021. There is post-pandemic recovery, and we are still seeing that but there is a relative decrease in its pace,” Haitham al-Ghais told the Algerian news channel in remarks aired late Tuesday and posted on social media on Wednesday.

Whether OPEC adds barrels or not the oil market is going to see more oil assuming that Libya can keep up at the pace they’re going and not have any more political setbacks. So as far as oil production is concerned, Biden might as well have stayed at home because the fist bump doesn’t look like going it is going to get him any extra oil.

We also had a report from the New York Federal Reserve yesterday that showed that American household debt hit a record high of $16.2 trillion. It seems rising inflation has more people putting debt on their credit cards and while defaults are not spinning out of control, they are starting to rise. That is raising concerns about the economy and the US consumer and their ability to continue to fill their gas tanks. Of course it’s a lot easier to fill their gas tank than it was because gasoline prices have fallen 49 days in a row.

Yesterday oil prices attempted to break out of their funk coming just short of the resistance after House Speaker Nancy Pelosi landed in Taiwan. Military rattling from the Chinese government and the promise of war exercises surrounding the island of Taiwan raised concerns by some military experts that this could be a repeat of Russia’s war games that eventually led to an invasion. Others just dismissed it as noise and reminded the world that China must not dictate the travel plans of the House Speaker of the United States. The House Speaker said that we will not abandon our commitment to Taiwan and we are proud of our enduring friendship.

War concerns eased a bit and oil prices seemed to sell off after what really should have been a supportive American Petroleum Institute Report (API). The API reported that crude supply increased by 2.165 million barrels which were higher than polled expectations. Yet I was confused why the estimates were not for a 2 million build because exports most likely were down and we were graced with another 5.4 million barrels of taxpayer-paid SPR barrels. Regardless of that build, we saw it as stocks fell by 351,000 barrels and we also saw gasoline supplies fall by 204,00 barrels.

The Biden administration, from their position, is going to be patient in buying back oil from the Strategic Petroleum Reserve. They seem to be looking at the futures curve and believe that they’re going to buy back the oil that they sold for the reserve at a lower price in the future. My recommendation to the Biden administration is instead of waiting around, put on the hedge in the futures markets today. I believe in the environment we’re in, that those prices on the back end of the curve are going to increase dramatically especially if your energy policies against U.S. oil and gas production continue along the path that they’re on.

And while the oil market and the petroleum market has been volatile and leaning towards the weak side, the reality is that this weekend into the second half of August the seasonal tendency for oil and products is to go higher. With reduced refining capacity in the US and the reality that refiners are going to have to go into maintenance would seem to suggest that while the petroleum complex might not be at the absolute bottom, we should be getting close.

In fact, looking ahead according to Moore Research using the May contract as an example, it has increased in price 14 out of the last 15 years between August 16th and August 29. We see the same strong pattern for October ultra-low sulfur diesel that has rallied between August 16th and August 30th, 14 out of the last 15 years. RBOB gasoline futures have also rallied between August 16th and September 9th, 13 out of the last 15 years. Based on current fundamentals I do not see any reason why those seasonals shouldn’t work this year. The reason is that even though demand has slowed a bit, the supply side has yet to catch up.

As the market prepares for the winter switchover, we should see those prices accelerate. On top of that as we get closer to winter in Europe, the concerns of Russia cutting off natural gas supplies and or oil supplies becomes an increasing risk that will have to be priced into the market. I would expect that if the Energy Information Administration (EIA) report mirrors what we saw from the American Petroleum Institute (API), that at some point we will see the complex start to move higher. In recent weeks when we’ve seen bullish data from the Energy Information Administration there almost seems to be a day delay for the market to react.

Natural gas continues its big swings in the wrong direction, driven somewhat by weather and uncertainty as to what’s going to happen with Europe as far as supply is concerned. Prices are also being held back because there’s an expectation that we will see a large 30 BCF increase in supply so this week the market seems to be pricing in that bearish number.

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