Oh, so they were serious about that. Oil prices are bouncing back after shaking off skepticism about Russia’s commitment to lowering oil production, states Phil Flynn of PRICE Futures Group.
Oil prices bounced as expected after Saudi Arabia decided to extend its 1.0 million barrel-a-day voluntary lollipop production cut through August but sold off on skepticism that Russia would hold up its end of the bargain. Yet data suggest that Russia is showing signs of compliance even though it may have something to do with seasonal factors. Yet OPEC Plus is serious about supporting the global oil market.
Oil prices rallied on a report from S&P Global that, “Russian seaborne crude exports fell 10% on the month in June to their lowest levels since February, according to tanker tracking data, as sales to refiners in India and China slipped back from a post-war high. Russia-origin seaborne crude shipments averaged 3.46 million b/d in June, the lowest since February but still 12% above average pre-war levels of 3.1 million b/d, according to S&P Global Commodities at Sea data.” This comes as Russia’s Deputy Prime Minister Alexander Novak pledged that Moscow will voluntarily cut oil exports by 500,000 barrels per day, on top of previously announced production cuts. Novak said, “As part of efforts to ensure that the oil market remains balanced, Russia will voluntarily reduce its oil supply in August by 500,000 barrels per day, by cutting its exports by that quantity to global markets.”
The market is now taking it seriously because as reported by Reuters the prices of Russia’s ESPO blend crude oil shipped to China have surged to a seven-month high as buyers rush to secure cargoes amid higher Russian demand and after Moscow pledged to cut exports. The Russian light sweet crude loaded at the Pacific port of Kozmino for August delivery to China traded at a discount of $4 per barrel against ICE Brent futures on a delivered-ex-ship (DES) basis, a significant jump from the $6 discount for July cargoes, traders said. It is the smallest discount since early December when the Group of Seven (G7) nations imposed a price cap on Russian crude, sending prices into free-fall as refiners and traders shunned the trade in fear of breaching the sanction.”
Bloomberg reported that “Crude flows through Russian ports jumped by about 1.3 million barrels a day in the week to July second, as flows through two key export terminals bounced back, following a well-established pattern that previously has been related to maintenance.” So, it makes you wonder about their commitment.
Yet Saudi Arabia remains committed. At the Opec Plus International Energy Summit, Saudi Energy Minister Abdulaziz bin Salman Al Saud said today that they “will do whatever is necessary to support the oil market.” They also seemed to give a vote of confidence in Russia’s Pledge. Amena Bakr tweeted that Saudi Arabia’s energy minister says it's at its “more meaningful” for Russia to cut its oil exports and that the cut they recently announced was voluntary and not “imposed”. Yet the UAE is not kicking in. The UAE’s Minister of Energy and Infrastructure (MoEI) Suhail bin Mohammed Al Mazrouei said that “Saudi oil production cuts will help balance the oil market, but the UAE will not join voluntary extra oil production cuts for now.
One of the factors they say that has weighed on oil prices has been weak demand. Yet China is still importing oil like crazy. According to Vortexa, Chinese crude imports hit the second-highest on record in June. Last month Reuters reported that China has issued a third batch of 2023 crude oil import quotas, raising the total volume in the first half of this year to 194.1 million tonnes, up 20% from the same period last year. It does not fit the slowing demand mantra.
We’ve seen some weakness in manufacturing numbers but if you look at travel numbers around the globe it’s exploding. The US had a record with passengers over the Fourth of July holiday weekend and we’re seeing near-record travel in China as well.
There are still concerns that the Federal Reserve is going to become more aggressive in raising interest rates to a point that will slow demand second half of the year but if you look at global oil inventories where they are now and where they will be at the end of the year, the economy better slow significantly or we’re at significant risk of sharply higher prices second half of the year. Because of that significant upside risk, it’s probably a good time to get hedged for that possibility. We think the options are relatively cheap right now, especially on the call side. It is probably a good time to start buying some of those cheap calls just as protection in case we get into a situation where we have a supply shock. I don’t believe that I’ve ever seen a market more complacent about the risk to supply than we’ve seen in the last couple of weeks. Maybe that complacency is well founded but history suggests that it may not be.
Overnight ultra-low sulfur diesel futures are surging on signs of tightening supplies and improving spreads. Gasoline saw some volatility, but it’s also pointed decisively higher. The market is responding to better-than-expected demand and tighter-than-expected supplies and at some point, supply and demand are going to matter. Also, the falling US oil rig count, and invention by Biden in the market, have discouraged investment which is going to lead to less US output and more dependence on OPEC oil.
Gas prices are holding their own with July heat and concerns about US exports are playing havoc with the market. Our general outlook for natural gas is very strong in the second half of the year as the world scrambles to supply itself in the face of a tightening oil and coal market.
Learn more about Phil Flynn by visiting Price Futures Group.
