Oil prices plummeted Monday morning as the focus moved away from the supply side, which will only get tighter, to fears about the demand side which the market fears will weaken, states Phil Flynn of PRICE Futures Group.
Also reports that Saudi Aramco pledges to supply full crude volumes to Asian refiners despite the production cut are raising concerns about Saudi’s commitment to the lollipop go-it-alone production cut. Speculator money is pulling out as the oil price volatility hits the lowest level since 2019.
You can dismiss the reports of record oil demand in China after China’s economic data showed that their economy grew at a much faster pace than expected of 4.5% year-on-year, versus expectations of growth at 2.9%. Yet despite that growth, the oil trade focused on Chinese exports which plummeted 7.5% year-on-year in May versus forecasts for just 0.4% fall and the biggest decline since January.
The oil trade has seen liquidity dry up on rumors of a deal to lift sanctions on Iran and fears ahead of this week’s Fed rate decision gave into fears again that the global economy will soon collapse. The same fears the markets have had for over a year even though it still has not happened.
Iran continues to claim though that there are no negotiations with the US over the nuclear deal. Iran’s Foreign Minister Hossein Amir-Abdollahian said there is ‘No such thing as negotiations.’ On the other hand, Iran says it’s close to a prisoner-swap agreement with the US. Oil traders are not buying the denials and are pricing in the lifting of sanctions.
Reuters also is reporting that “Iraq has agreed to pay about $2.76 billion in gas and electricity debt to Iran after receiving a sanctions waiver from the United States, a senior Iraqi foreign ministry official said. Iraqi Foreign Minister Fuad Hussein was given the clearance during a meeting with US Secretary of State Antony Blinken on the sidelines of the Riyadh Conference on Thursday, the foreign ministry source, who spoke on condition of anonymity because he is not authorized to speak to the media, told Reuters.
The reports that Saudi Aramco is going to supply full crude volumes to Asian refiners is probably not a sign that the Saudis don’t plan to follow through on their production cut. The truth is that the Saudis have a good relationship with these Asian refiners and have the ability to cut production while continuing to supply the Asian refiners with crude. That means cuts to the US and other places will be much more pronounced. US imports of Saudi crude have already fallen to multi-year lows.
Goldman Sachs is also lowering its oil price forecast. The Wall Street Journal reports that “One of the biggest oil bulls is growing less bullish as the crude market runs into renewed pressure. Goldman Sachs cut its end-of-year outlook for Brent crude to $86 a barrel, from $95. Goldman Sachs forecast a big rally in April when it expected surprise output cuts by members of the OPEC+ cartel to tighten supplies.
Instead, oil prices skidded this spring in response to a gusher of exports from Russia, as well as traders’ concern about waning demand. The selloff prompted Saudi Arabia to say early this month it would cut production again. The rally that announcement sparked has faded fast, pulling Brent down 4.5% over the past week. Goldman blames swelling supplies, particularly out of Russia, Iran, and Venezuela. Russia appears to have reduced output by just half of the cut it promised in February, analysts at the bank said. They expect Moscow to come closer to meeting its commitment.”
Oil traders are also defensive ahead of the Federal Reserve meeting. As far as oil prices are concerned, the Federal Reserve has gotten its way. They have been desperate to quell inflation and set off on one of the most aggressive rate-hiking cycles in history. If you look at the price of oil in the market action the Federal Reserve definitely can take a pause here and they can almost say mission accomplished. The problem is that the Federal Reserve may have brought down prices for oil temporarily but could have also created an investment drop-off that will tighten supplies later this year.
The US has started to refill the Strategic Petroleum Reserve even though they haven’t quite finished selling oil from the reserve. I know it’s crazy but welcome to the world of government. The US Department of Energy’s (DOE) Office of Petroleum Reserves announced that contracts have been awarded for the acquisition of 3.0 million barrels of US-produced crude oil for the Strategic Petroleum Reserve (SPR). These contracts follow the Request for Proposal that was announced on May 15, 2023. Furthering the Biden-Harris Administration’s three-part replenishment plan, DOE also announced a new Notice of Solicitation to purchase approximately 3.1 million additional barrels of crude oil to the Big Hill SPR site this September.
It continues to be that we expect the market to see tightening supplies and as this year goes on, I think short-term increases in Russian supply and the perception that the Chinese economy has hit a brick wall is still giving the market a false sense of security. The severe drop in the oil price volatility index suggests that this market is ripe for a turnaround in the very near future. The complacency in the market is not justified considering the fact that the inventories are still well below average even though they’ve improved more than anticipated. This should be a perfect time if you are bullish just start buying option strategies because they’re the cheapest they’ve been in years.
Learn more about Phil Flynn by visiting Price Futures Group.