Do We Have a Deal?

12/03/2020 10:00 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Global oil markets are in flux as we all wait to see if OPEC and their favorite co-conspirator Russia can agree to a production deal and avoid another all-out price war, says Phil Flynn of the PRICE Futures Group.

While nothing is official yet, it is possible that we could be getting a deal but not precisely what traders were expecting.

For weeks the markets expected a rollover of the April production cuts of 9.7 million barrels a day for three months so the market could adjust for an expected wave of coronavirus lockdowns this winter. Yet players like the UAE and Russia felt that the global demand picture was improving enough to where the group should start raising output. That created a rift with the OPEC de facto leader Saudi Arabia and threatened to start another production war that might have crashed prices. Yet it appears that cooler heads have prevailed, and if The Wall Street Journal has it right, we could start to see OPEC Plus raise output by a modest 500,000 barrel a day starting next month.

Oil markets showed a bit of disappointment with an expected OPEC plus Russia plan to raise output by a modest 500,000 barrels a day next month but is in the dark about whether this deal could still fall apart. We know that this deal adds oil to the market where the market had priced in an extension of the existing cut for three months.

Still, if that deal is agreed to, the market may forgive them as Covid vaccines are being approved, and it is a relatively small increase compared to the 9.7-million-barrel reduction. Oil demand expectations are on the rise, and despite new lockdowns, the hopes are that a vaccine will significantly raise demand in the second half of 2021.

We still believe that oil has seen the lows for this year, barring an all-out oil production war breaking out. Oil prices are in an uptrend, and if OPEC gets a deal, we could still see $50 a barrel before the end of this month.

Gasoline demand was a bit disappointing, and diesel demand fell because of the Thanksgiving holiday. At Reuters, John Kemp points out distillate rose +3.2 million bbl last week, mostly due to the Thanksgiving holiday. The average increase in the previous five years for the same week was +3.1 million barrels, with a range of +2.1 million to +4.3 million. That put supply 8.5% above the five-year seasonal average, basically unchanged from the week before: demand was +2% above the five-year average, but production was -13% below the same average a year ago.

Now with refinery runs low, the product outlook looks bullish. Lock in hedges.

Natural gas needs stable weather forecasts. Weather models have flipped back and forth, causing gas pressure. Natural gas gets its report, and we should get a 17 bcf withdrawal. 

Learn more about Phil Flynn by visiting Price Futures Group.

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