While the technical damage to the petroleum complex markets is undeniable, the question becomes how much of this reflects a major collapse in global demand and how much is just a technical game.
The market’s recent collapse suggests not only has the market taken out the risk of a loss of supply from the Israel-Hamas conflict but from any other conflict in the universe. It is also signaling a potential global recession that despite some real demand concerns, has not happened yet.
Today the Saudi oil minister is calling out those evil speculators, whom I am a proud member of, by saying that the recent selloff in oil is not about supply or demand but is “just a ploy”. Saudi Arabia’s energy minister Prince Abdulaziz bin Salman is calling out the recent oil price collapse by saying it’s “phony.” He seems to be very upset when he hears talk about weak demand out of China or any other play in the world.
The prince says that, “speculators are the problem, not demand. Demand “It’s not weak,” People are pretending it’s weak. It’s all a ploy.”
Well, the ploy is working, and repairing the technical damage to the market is going to take a sharp price reversal. The 10-day moving average for oil is way up to 8018 and that looks so far away at this point. A close above that point would cause a sharp v reversal but is still far away. Yet as far as demand, the Saudi oil minister is correct, we have not seen a major drop in demand, but we have seen a major spike in oil demand fears.
We started the sell-off on fears of a Chinese demand crash on lower refining margins that pulled back from near-record highs. China lowered its selling price for oil products and that along with weak economic data caused a run on the Chinese oil bank. Yet after that sell-off, data for barrels of oil was strong. China’s crude imports spiked by 7% in October after its 13% drop in September. We also saw that China’s oil supply had dropped by 70 million barrels from late July through late October.
The Saudi oil minister said about 75% of Saudi Aramco’s exports go to Asia and they would be the first to know if there was any sign of a slowdown in demand. Today it is being reported by Giovanni Stanovoy that the government of the Shandong province China independent refinery hub has asked Beijing for an extra 3 million metric tons of fuel oil’s import quotas for the rest of 2023 to enable plants to raise output in a shortage of crude oil quotas. If refining demand was so bad, then why are they requesting more oil? There is another report today that Iraq is cutting off oil exports from Kurdistan they are claiming that there are overdue payments.
Still, you must respect market action. No demand isn’t bad demand. Oil demand normally slows down this time of year. Yet based on market action we must assume the possibility that the price of oil is like the canary in coal mine signaling a major recession. And with an OPEC meeting coming up on November 26th, one must wonder whether the Saudi energy minister is going to make good on his previous promise to make speculators “Ouch like hell.”
What we are also seeing is a reversal of the war risk premium. When the market sometimes gets a lot of speculative buying due to war fears and it doesn’t happen, there normally is an oversized reaction to the downside. More than likely that is what we’re seeing. If you still believe in the bull case then options are the most attractive, as they have been in a year. If you are in a recession camp, then sell Mortimer, sell. The reality is it is based on current demand. Unless the global economy really falls off the map, demand should go up not down from this point forward.
The other thing to keep in mind is that we normally see a seasonal low this time of year but usually we start to turn around in price because refiners start to come out of maintenance. If you’re going to be negative this is the time to be the most negative. Oil products also look very weak even though we’re seeing signs of some life in the cost of our RBOB gasoline but we do have to see the market close strong to reverse the negative sentiment. It may take a few days before the market starts focusing on supply and demand and in the shoulder season it’s easy to predict that demand will stay low.
Remember all that talk of peak oil? How was the world running out of oil? Then came the shale revolution. Well, shale keeps coming. Market Insider reports that Legendary oil mogul Harold Hamm eyes the next stage in the US shale oil boom:
‘Generation 3’ rock. Mr. Hamm says that technology is going to exist to get oil out of shell rock that was previously considered to be too hard to handle. Don’t underestimate American ingenuity.
There is no natural gas report today, but we are seeing weakness due to warm weather. Reuters reported that natural gas futures eased about 1% to a two-week low on Wednesday on record output and forecasts for mild weather through late November, keeping heating demand low and allowing utilities to continue injecting gas into storage for a couple more weeks. Front-month gas futures for December delivery on the New York Mercantile Exchange was down 3.5 cents, or 1.1%, to $3.105 per million British thermal units (mmBtu) at 9:29 a.m. EST (1429 GMT), putting the contract on track for its lowest close since Oct. 25 for a second day in a row. A bearish factor that has weighed on the futures market for much of this year has been lower spot or next-day prices at the Henry Hub benchmark in Louisiana.