The Saudi Put

08/09/2019 3:02 pm EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

While there is a great deal of fear of weakening global demand, Saudi Arabia still holds a put on the crude market and will use it if prices drop too far, writes Phil Flynn.

Saudi Arabia and their OPEC and non-OPEC co-conspirators vow to do whatever it takes to stop the drop in the price of oil. That may get harder as the International Energy Agency (IEA) warns about the rising risk to global oil demand growth and a fragile oil market. The main risk is the U.S.-China trade war they say but looking at Chinese export data, one might wonder what all the fear is about.

Some economic data does seem to be flashing warning signs, but global loosening of monetary policy should spark oil demand just when OPEC starts to cutback output. This could offset some of the normal demand softness into shoulder season and even some of the new supply that should come online as U.S. pipeline capacity gets increased later this year. 

Rumors of the Saudi plan to stop the oil price slide are staring to leak out. Bloomberg reports that Saudi Arabia is to keep oil exports below 7.0 million barrels a day next month as OPEC countries allocate less oil than demanded by customers, according to Saudi officials. There are cuts in allocations applied to all regions according to Bloomberg. They also say that Saudi oil production will be lower in September. The funny thing is that despite all the fears of a crash in oil demand, Saudi officials say nominations show strong demand for oil in all regions. Bloomberg says that the Saudi’s “could have satisfied September demand and produced about 10.3 million barrels a day because demand is much higher, but decided to keep production, exports flat and cut customer requests by 700,000 barrels a day in effort to maintain market stability."  

Yet the International Energy Agency, known for their major underestimations of global demand, are warning of another global demand slowdown. At the same time, they admit that global oil inventories have been tightening mainly due to OPEC production cuts. The IEA says, “There have been concerns about the health of the global economy expressed in recent editions of this Report and shown by reduced expectations for oil demand growth. … the US-China trade dispute remains unresolved and in September new tariffs are due to be imposed."  

The IEA continued, "Oil demand growth estimates have already been cut back sharply." 

Natural Gas Update

In the meantime, growing concerns about natural gas flaring could raise another challenge to the U.S. shale production outlook. In their quest to produce, oil drillers are producing an extraordinary amount of associated natural gas and because there is no pipeline capacity and production is exceeding demand, in many cases it is getting flared or burned off. 

Bloomberg News reported, “An unusual split vote by Texas regulators over the flaring of natural gas shows that the days of giving a free pass to the controversial practice may be numbered. The chairman of the Texas Railroad Commission, which oversees the oil and gas industry, dissented during a recent hearing over a flaring permit. Wayne Christian said there’s too much gas being burned off out of convenience rather than necessity, … the volume now being flared -- more than residential gas demand for the whole of Texas -- has attracted criticism for both its wastefulness and the carbon-dioxide emissions that come with it.” 

Oil traders have been awaiting new pipelines and have been pricing in the potential impact from new supply. Reuters news reports that, “The operators of two new pipelines in West Texas shale fields are offering discounted prices to attract shippers accustomed to high fees to move oil to export hubs, according to the pipeline companies and federal filings.”

Bottom Line

The bottom line for oil and products is the fact that there is too much economic doom and gloom. While there has been some slowing, oil demand is not that bad. Economic data out of China on exports might be a sign that we may already be reversing the recent softness in the market. Now with OPEC cutting back more and global supply tightening, we are pricing in too much of a slowdown. Be an oil bear-market contrarian. 

The EIA says that working gas in storage was 2,689 Bcf as of Friday, Aug. 2, 2019. This represents a net increase of 55 Bcf from the previous week. Stocks were 343 Bcf higher than last year at this time and 111 Bcf below the five-year average of 2,800 Bcf. At 2,689 Bcf, total working gas is within the five-year historical range. The number was slightly supportive but natural gas is having a hard time rallying even as demand is at record highs. Mainly because production is even higher. 

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