A weekly look at what occurred in the oil markets of the U.S. and the world this past week.
The price of oil has been locked in a seesaw for a month. Since West Texas Intermediate (WTI) crude moved above the $50/barrel (b) level on January 9 (which marked a roughly $10 increase from the recent Christmas Eve 2018 market low), it has gone essentially nowhere. It has settled at more than $55/b once; it then fell back Thursday to a level only 28 cents more than where it settled on January 9 and on Friday settled at $52.72, a 2.39% decline for the week. Markets are dealing with a variety of news, both bullish and bearish, on what seems like alternating days. Besides being impacted by general macroeconomic trends – for example, a 1.9% decline Thursday was attributed mostly to a stock market slide that in turn was caused by concern over U.S.-China trade talk delays – oil markets just in the last week have been impacted by a series of offsetting bullish and bearish news items.
Bullish
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Going back to the end of last week, three media agencies reported significant cuts in OPEC output, on either side of 900,000 barrels per day (b/d). That is more than the 800,000 b/d that OPEC agreed to cut beginning in January, a number it agreed to at the group’s December meeting. But the 800,000 b/d was coming off a higher base of the group’s October output so there is still more to go. But after the cuts, the various agencies estimated that OPEC is about 170,000 b/d or so away from full implementation of the 800,000 b/d targeted reduction.
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Venezuela is shaping up to be giving more support to OPEC’s efforts than was likely anticipated without having had any plans to do so. It had no cut assigned to it, lumped in with Libya and Iran as the three countries that have so many issues (sanctions, political turmoil) that requesting a cut seemed pointless. But in the past week, there have been a slew of reports regarding Venezuela that are indicating the country could see its output drop 200,000 b/d to 300,000 b/d in a fairly short period, off a January level of 1.1 million b/d, because it is not able to easily find outlets to replace the U.S. buyers it has lost as a result of sanctions against its state oil company PDVSA. Tankers have been backing up in the U.S. Gulf and they’ve been backing up in Venezuela. (With several different tanker tracking software programs universally used for tankers, those sorts of backups are now easy to track.) The loss of diluent supplies to Venezuela is viewed as a critical loss. Venezuelan crude is “heavy” – some of its grades are more akin to tar than oil – and the light diluent from the U.S. is needed to allow it to move. Those exports are stopping as a result of the sanctions against PDVSA, and with the U.S. so geographically close as well as having plentiful supplies of diluent as a result of the shale boom, replacing it is going to prove difficult.
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The program in the Canadian province of Alberta to rein in its output has been reduced by 75,000 b/d off its 350,000 b/d initial cut and is likely to end soon, according to Suncor CEO Steve Williams. The price for heavy oil coming out of Canada relative to benchmark WTI has risen significantly – boosted most recently by cuts in OPEC output and the Venezuelan crisis – and Williams told Bloomberg that the problem now is that the price of Canadian heavy crude is so high that it’s becoming uncompetitive.
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U.S. distillate inventories are beginning to tighten. In the latest weekly U.S. Energy Information Administration (EIA) report, the inventory of distillate stocks was reported at 31 days, well below the 10-year average of approximately 37 days for the first week of February. Also, in that same weekly EIA report, gasoline consumption in the U.S. (as measured by its four-week average) was reported as the highest since 2007. This caused prices to spike on Wednesday of this past week. But traders must have begun looking at the bearish side of the ledger because prices came right back down a day later, wiping out almost the entire gain. And when they looked at that side of the ledger, they found.
Bearish
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When OPEC announced its big cut in December, a group of non-OPEC countries led by Russia was going to lend its support with 400,000 b/d of its own cuts. But Russia is reported to have reduced its output by just 42,000 b/d since the start of the year. The expectation was that Russian cuts would be 50,000 b/d per month, which is still relatively minor in a country that produces about 11.4 million b/d. And Russia couldn’t even do that.
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Libya’s Sharaha oil field, taken over by rebels at the end of 2018, was retaken by a force led by a Libyan general in the past few days. Capacity there is 350,000 b/d, but it is uncertain just what damage might have been done to facilities at the site. Still, that is Libya’s largest field and raises the possibility of Libyan flows rising. (Libya’s output was estimated by S&P Global Platts at 850,000 b/d in January.)
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The dollar is stronger. A stronger greenback generally translates into lower commodity prices, since commodity prices are generally priced against the dollar in most of the world.
In other news this past week:
—As OPEC continues to reduce its output, legislation designed to punish the organization sailed through a committee in the U.S. House of Representatives. What’s different this time around – it’s gotten through some of the legislative process in prior years – is that the President earlier expressed his support of such legislation. The House Judiciary Committee, on a voice vote, approved the bill known as NOPEC, the No Oil Producing and Exporting Cartels Act. It would allow U.S. antitrust law to be brought against OPEC, and its members can be sued. Although Donald Trump in his pre-presidency and campaign days expressed support for such an action, he’s now the President who already has shown a significant amount of backing for Saudi Arabia in the wake of the murder of Jamal Khashoggi. Would he support this legislation now, which Saudi Arabia has opposed vociferously in the past? So far, it isn’t scheduled for a vote by the full House much less the Senate.