Oh please OPEC, could you end the oil squeeze? It was our shale, that was flowing, but it’s over. Please OPEC, please if you know what I mean, I don’t ever want to have to beg again.
Oh, how times have changed. The Biden administration is once again begging OPEC to come to a compromise to increase oil production, but at the same time, they’re doing nothing to inspire U.S. energy producers to come back to the table.
Apparently, OPEC oil is more virtuous than U.S. oil. Oil prices went on a wild ride in post 4th of July fireworks that now have become commonplace.
As we wrote weeks ago, it seems that every 4th of July we have some type of drama. Generally, we rally prices strong into the 4th of July and then we always tend to pull back, either right before the holiday, on the holiday, or shortly thereafter.
This time it came as the OPEC plus talks broke down over a dispute between Saudi Arabia and the United Arab Emirates over what baseline to use for production quotas. That caused prices to hit resistance just around $77.00 a barrel as the dispute raised concerns about the viability of the future of OPEC’s production cuts.
There is even speculation that this dispute will break up the cartel and lead to another oil production war.
We are hearing from Saudi Arabia that says this dispute will not cause another OPEC production war. Still, there is a lot of displeasure from Russia that basically said the dispute to not raise production was unacceptable to Russia.
Reports are that U.S. shale producers took advantage of the rally to put on hedges. Some of that hedging activity may have pushed down prices as well, especially on lighter than normal volume. It is unlikely that even with this hedge U.S. shale oil production will come back as big as it had been in the past.
Fiscal discipline by shale producers, as well as the lack of fossil fuel investment by hedge funds and banks, means that even with the price increase, we may only expect to see shale producers at only about 200,000 barrels a day next year.
There is also some speculation that this dispute between Saudi Arabia and the United Arab Emirates has been staged to get away with only raising production a modest amount so that they can keep prices high.
I believe most OPEC producers are not very concerned about U.S. shale coming back online and that may be one reason they want to lock in a crisis now because they expect prices to go higher.
Admittedly that’s a wild theory, but it is an interesting story. It’s probably not true but kind of fun to listen to what people are talking about.
Our take on the whole dispute is it will get settled. We still believe that even if OPEC raises production, that the amount that they are proposing is just barely enough to keep up with growing demand. We’re already seeing U.S. inventories fall at a record pace and global inventories are tightening as well.
Reports that Saudi Arabia raised the price of oil to all their customers, even in Asia, has not seemed to slow demand for Saudi oil. Reports are that Chinese refineries and other Asian refineries ordered the maximum amount of oil that they could get even at the higher prices.
As far as the dispute between Saudi Arabia and the UAE, it most likely will be settled. Both parties should realize that they’ve come too far to let this agreement fall apart over a couple of 100,000 barrels. There will be a way to save the deal and more than likely, when it happens, we’ll see a slight correction in the price of oil.
Then we’ll be back to the reality of the situation that the market is still going to be undersupplied as we get into the fourth quarter. We have steadfastly captured a long term bullish outlook for oil and we continue to do so. We’re not surprised by the volatility and we expect the volatility may pick up a little bit.
It’s not unusual to see a little bit of a break after the 4th of July holiday and there is an expectation that the post 4th of July demand for gasoline eases just a bit. But generally, we have a tendency to regain our momentum for an August rally.
We continue to suggest that any big pullbacks could be opportunities for long-term buys. In the short-term, we expect more volatility, but hedgers really should be hedged for the long haul. We are in a super cycle for oil and we expect this to continue.
Natural gas cooled off a little bit but it’s holding its ground as we continue to see very strong demand for exports.
The market is going to pay attention to tropical storm Elsa which is bearing down on Tampa. The market will wait to see if any power outages reduce demand.
Let’s pray for the people in Florida that the storm does little or no damage and that all are safe.