By Barani Krishnan
Investing.com -- “Woo-hoo! Gasoline prices are below $4.00 a gallon! Inflation came in lower than expected! I hope you enjoy this wonderful economic news but I’m afraid to tell you it may not last.” Phil Flynn, an avowed oil bull and analyst at Chicago brokerage Price Futures Group, wrote in one of his market commentaries two weeks ago.
The OPEC+ alliance of oil producers will decide in just over a week from now if Flynn’s right.
A flurry of support was expressed on Friday by OPEC+ member states, including Iraq, Venezuela and Kazakhstan, about readiness within the 23-strong oil producing alliance to intervene and restore balance in the oil market.
A week earlier, OPEC+’s de facto chief Saudi Arabia said the group could cut production “anytime”, after its secretary-general Haitham Al Ghais of Kuwait hinted that output restraint could be an option for bringing the market back into balance.
“Balance” is OPEC+’s catchphrase for production cuts, a situation it deems necessary whenever oil prices are at the risk of a continuous decline. From highs of almost $140 a barrel in March, global crude benchmark Brent has come down to just around $100. U.S. crude, meanwhile, hovers at under $95, from peaks of above $130 six months ago.
But the problem with any production cut by OPEC+ is that it will not only boost the price of oil but also that of the pump price of gasoline - something the Biden administration is trying hard to prevent.
Since last November, Team Biden has drawn down the U.S. national emergency oil stockpile called the Strategic Petroleum Reserve to 37-year lows to add up to one million barrels per day of supply that would bridge any crude shortfall experienced by U.S. refineries.
The net effect of the so-called SPR release is a U.S. market that’s now virtually swimming in oil, so much so that some of the emergency oil now ends up as U.S. crude exports that soared to a record high of 5 million barrels per day two weeks ago, adding to global supplies as well.
This is what OPEC hates.
Data for the most recent week to Aug. 19 showed that in addition to the shipment of 4.177 million barrels of U.S. crude, there were 6.899 million barrels of gasoline and 2.370 million barrels of other oils that made it for overseas sales last week. The total, of 11.076 million, overwrote the previous week’s grand oil sales of 10.709 million.
In terms of crude production itself, the United States put out 12 million barrels per day last week.
“The U.S. is nearing one day’s production of oil for the combined crude and products’ exports it is doing,” observed John Kilduff, partner at New York-based energy hedge fund Again Capital.
“Erosion of market share was what led the Saudis to ramp up production before the pandemic, to try and kill U.S. shale [oil],” said Kilduff. “At the rate the U.S. is exporting oil, Saudi Arabia and the rest of OPEC should be worried for their market share. Although U.S. crude production remains below pre-pandemic highs, these sort of export numbers will raise Saudi eyebrows for sure. They won’t like this one bit, I can tell you.”
On top of this, Russia is selling its oil at a discount of $30 per barrel to Brent to keep its widely sanctioned economy running, and to generate cash for its war on Ukraine. The discount has been weighing for months on the international pricing of oil as Russia brazenly quotes what works for its most favored customers, China and India, which also happen to be the world’s first and third largest buyers of crude, respectively.
It is an open secret that the Russian action has hurt, among others, the export potential and pricing for international oils such as Arab light crude. One reason state-owned Saudi Aramco (TADAWUL:2222) repeatedly raised the selling price of its oil since the Ukraine invasion was to prioritize revenue over market share/competition.
The Saudis detest the Russian discounts but there’s little they can do about them. Why? Aside from Riyadh, Russia is OPEC+’s other pillar of support, that’s why. The Saudis will do any song-and-dance, including high-fiving Vladimir Putin, to keep the Russians within OPEC+ because Moscow’s exit - as demonstrated just before the 2020 coronavirus outbreak - will most likely devastate oil prices again, leading to the potential breakup once and for all of the alliance.
The other problem for OPEC+ now is the risk of Iran getting a renewed nuclear deal with global powers that would tentatively remove U.S. sanctions on its oil, legitimately putting another million barrels per day or so from Tehran on the market. The fight over oil market share aside, the Saudis have treated the Iranians, one of the co-founders of OPEC, like lepers within the group since former U.S. president Donald Trump canceled the Iranian nuclear deal in 2018 and placed sanctions on the Islamic Republic’s oil exports. Tehran, in return, is believed to have masterminded the 2019 attacks on Arab oil facilities and sponsored other raids on the kingdom’s energy infrastructure since, using Houthi rebels in Yemen. It will be interesting to see the dynamic that plays out between these two, should Biden reactivate Iran’s nuclear deal on the expectation of more supply from Tehran.
Last but not least, is the potential that the early part of the upcoming winter will be warmer than usual, negating the need for early heating, which could mean substantially lower demand for oil than thought. “There are already indications from the longer-range weather forecast models that the first half of the 2022-23 winter may come in warmer than normal,” Dan Myers, analyst at Houston-based energy markets consultancy Gelber & Associates, said in a recent note.
All these suggest that when OPEC+ sits on Sept. 5 for its next decision on oil production rates, a production cut could be likely.
At the same time, the head of the Federal Reserve said on Friday that the central bank won’t back down from “forceful” U.S. rate hikes till it gets inflation back to its target of 2%, from current highs of above 8%. Any economist knows that although energy prices are removed from the calculation of core price pressure, they matter substantially where real inflation is concerned. Interestingly, oil bulls paid little heed to Fed Chair Jerome Powell’s speech at the central bank’s annual Jackson Hole, Wyoming summit on the economy, drooling instead on the likelihood of OPEC+ cuts.
“It appears that the oil bulls have a ‘selective hearing problem’ to the Fed chief’s speech,” said Kilduff of Again Capital. “It’s obvious that if the Fed is going to bust inflation, it’s going to have to take an ax to oil prices, particularly the pump price of gasoline, which it has already done and will be doing increasingly so in the coming days, weeks and months.”
Pump prices of gasoline averaged a record high of $5.01 a barrel in mid-June before falling steadily to below $3.87 now, according to data maintained by the American Automobile Association.
One main reason for the drop in gasoline prices has been the release of crude from the SPR stockpile. The Biden administration is supposed to wind that down in October. There’s nothing to stop it from extending the drawdowns into the early part of the winter.
Oil: Market Settlements and Activity
New York-traded West Texas Intermediate crude, the benchmark for U.S. crude, did a final trade of $92.97 after settling the official session at $93.06, up 54 cents, or 0.6%.
For the week, WTI showed a gain of 2.5%, after the previous week’s drop of 1.4%.
Brent crude, the London-traded global benchmark for oil, did a final trade of $100.60 after settling the official session at $100.99, up $1.65, or 1.7%.
For the week, Brent was up 4.4%, versus the previous week’s slide of 1.5%.
Oil: WTI Outlook
WTI’s key bullish level to watch will be a break towards $97.06, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“If WTI gains acceptance above this level, the bullish rebound can continue towards the weekly middle Bollinger Band of $104.40,” he said.
WTI’s daily stochastic reading at 73/78 was attempting a positive overlap and further up move, challenged by the 200 Day Simple Moving Average of $95.97 and closely followed by the 50-Day Exponential Moving Average of $97.06, Dixit said.
But he cautioned that the trend could reverse.
“It’s important to note that a decisive break below the Daily middle Bollinger Band of $91.30 will push oil down to the 61.8% Fibonacci level of $88.55."
Gold: Market Settlements and Activity
Gold bulls hoping to creep closer to $1,800 an ounce found themselves more than $50 below that target at Friday’s close, after the head of the Federal Reserve signaled no immediate pause in the central bank’s inflation-busting rate hikes.
“Gold is vulnerable here as the Treasury yields could gain further momentum next week if the labour market remains healthy,” said Ed Moya, analyst at online trading platform OANDA. “The risks of one last major move lower remains for gold.”
The yield on the benchmark 10-year Treasury note edged towards Wednesday’s two-month highs after Fed Chair Jerome Powell said the central bank will keep at “forceful” rate hikes until its fight against inflation is done.
The benchmark gold futures contract on New York’s Comex, December, did a final trade of $1,750.80 on Friday after settling the official session at $1,762.90 per ounce, down $21.60, or 1.2%. For the week, December gold fell 0.7%.
The spot price of bullion, more closely followed than futures by some traders, showed a final Friday price of $1,738.40, down $20.36, or 1.2%. For the week, spot gold was down 0.6%.
Gold: Price Outlook
“If spot gold doesn't break below the weekly low of $1,727, it will possibly witness a rebound to $1,745-$1,750, that can extend to $1,760,” said Dixit of SKCharting.com. “This is required for resumption of uptrend for retest of $1,777-$1,783.”
“However, considering the weakness in momentum, a break below $1,727 can expose gold to $1,708, which is the 78.6% Fibonacci level of retracement from the upswing of $1,681-$1,808.”
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.