OIL GOING BACK DOWN FOR HOW LONG?

Oil prices going lower. Another unexpected increase in gasoline stockpiles was weighing on the market on Thursday.

Following U.S. Energy Information Administration data showing gasoline inventories rose by 2.1 million barrels last week, at a time when analysts thought those inventories had declined. This sent a panic into the prices. It raised questions about whether demand would grow enough during summer driving season to reduce the glut of crude.

The reality is that the market in need of a major reduction in U.S. refinery activity as OPEC and Saudis are not strong enough to reduce the supply glut.

Market sentiment was already weak the International Energy Agency, noted that the global supply growth rate continues to outpace demand. OPEC is trying hard to control its output but nobody is controlling the US producers….and it does frighten the markets. The output cuts by OPEC and other producers including Russia is not enough to bring confidence.

The IEA predicts non-OPEC production, mainly U.S. supplies, will grow by 1.5 million barrels a day in 2018, while global daily demand will only see a rise of 1.4 million barrels. This is very concerning and US producers should understand that producing too much could hurt their bottom line on the long-run if the price goes back in the 30ies. U.S. crude prices tumbled more than 9% over the past three weeks and are down about 13.5% this year, back near where they were before OPEC’s deal was first announced in November.

ROLE OF SAUDI ARABIA

Saudi Arabia in a dramatic move has reduced its U.S. oil exports to a nearly thirty years low for this time of the year, trying to reduce a global supply glut that has been affecting crude prices.

State-owned Saudi Arabian Oil Co. expects sales to the U.S. will drop below one million barrels a day in June, then slide to about 850,000 barrels a day in July. If the 850,000 figure is confirmed for July it would be lowest export total to the U.S. for that month in 30 years, based on figures from the U.S. Energy Information Administration.

LIMITED OPEC INFLUENCE

Is OPEC able to influence the trend remains a question now. The group cut output this year in an effort to ease a longstanding glut, but U.S. companies have rushed to fill the void left by OPEC.

Reducing its exports to the U.S. show that Saudi Arabia is “getting serious” about addressing the problem. But the market is now focused on U.S. inventories, and the impact is quick. Market reacted immediately to the US numbers, prices fell more than 5% in a week time.

In addition, the lack of clarity into the global supply picture, and the doubts among some investors about whether OPEC members are cutting as much as they say, are reasons why oil prices have been so volatile in recent months. Combination of all these factors are depressing the price of oil. Where are the $60 everyone was hoping for in January….

When OPEC announced late last year that it would cut output followed by Russia and other major producers, the markets reacted positively and sent crude prices rising.

U.S. producers quickly took advantage of those higher prices, and pushed up their output after two years of suffering at $30 a barrel. Will the Saudis move be enough to bring back a price above $50? Even with the falling exports, many remain skeptical after years of oversupply.

As we predicted earlier this year the war is raging between Texas and the Middle East and the price of oil is being arbitrated by the Markets somewhere in between.