We are getting a first look at OPEC’s commitment to its voluntary production cuts as US diesel crack spreads rise in response to tight supply, states Phil Flynn of PRICE Futures Group.

Cease-fire talks between Israel and Hamas failed when Hamas rejected the terms. A disruption in the Keystone Pipeline gave oil a pop on supply concerns, but its larger concerns about global oil supply tightness continue to raise concerns. Then oil dipped on a Reuters report that the head of the International Energy Agency’s (IEA) said the global oil market is relatively well supplied.

Record-breaking refinery runs in China suggest that even with a big year-over-year drop in Chinese car sales, the IEA's predictions about global demand were low, and reports that China’s demand growth will slow due to a switch over to green energy might be less likely after a major Chinese oil discovery. China’s CNOOC discovered a 100-million-ton oilfield in the South China Sea. While the Biden administration continues to put more burden and taxes on US oil and gas producers, I highly doubt China will stand in the way of the CNOOC development of these wells.

So committed is OPEC. The latest Platts OPEC+ survey by S&P Global Commodity Insights said that “the 22-country alliance held its crude production exactly flat month-on-month in February. They said that OPEC pumped 26.58 million barrels a day (mil b/d), and allies added 14.63 mil b/d. They said that countries with quotas produced 175,000 b/d above their caps, with Iraq and Kazakhstan being the biggest cheaters.

This came after Saudi Arabia, Russia, and several OPEC+ producers extended voluntary crude supply cuts until the end of June. And they are warning of a supply deficit if they extend cuts until the end of the year.

The Energy Information Administration confirmed what we already knew, and that is that China broke refining records. The EIA wrote, “Crude oil processing, or refinery runs, in China averaged 14.8 million barrels per day (b/d) in 2023, an all-time high. The record processing came as the economy and refinery capacity grew in China following the country’s COVID-19 pandemic responses in 2022.

Weaknesses in the oil market today could be some preemployment report profit-taking, and geopolitical risk factors for oil continue to be very high. Reports that the United States is warning people there could be attacks on the US embassy and for all American citizens to leave Russia are also raising concerns in the marketplace today. US gasoline demand and diesel demand are going to rise, and that’s raising concerns about the supplies being below average for this time of year. Industry insiders believe that if the Biden administration has the courage to follow through on Venezuelan oil sanctions, then the supplies of diesel are going to be very tight.

Natural gas producers have major issues after winter failed to happen. Producers must cut back, and those that will survive most likely will be hedged, and based on data from the CME Group, many did. The CME Group wrote that “in February 2024, warmer weather engulfed much of the US. The consistent record production levels, coupled with reduced demand, led to a decline in price throughout the month. Gas prices this month fell to an inflation-adjusted 30-year low of $1.50/MMBtu, with inventory levels 20% above 5-year averages.

Natural gas prices were at their 10-year lows, but prices surged after the production cut announcement from Chesapeake in the Permian on February 21st. Before this announcement, the most actively traded strikes were between 1.5 and 1.75; during the rally, the most popular strike was 2.000. Traders continue to use the most liquid Henry Hub futures and options CME markets to manage risks. CME Henry Hub Natural Gas Futures Avg. Daily Volume in February 2024 was 581K, up 17% YoY. Avg. Open Interest is 1.53M, up 25% YoY. Henry Hub Options broke records in February with a new monthly average. Daily volume record of 273K. Henry Hub Option’s single-day open interest is 4.7 million, the highest it’s been since 2014.

Learn more about Phil Flynn by visiting Price Futures Group.