Oil is taking it easy and easing off a bit after reports that Saudi Arabia will lower the selling price of oil to Asia by about one dollar a barrel. The Reuters survey says that the producer is expected to cut official selling prices (OSPs) of all grades by more than $1.00 in February from the previous month, dropping prices back to their lowest levels in three to four months. That raised some demand concerns but at the same time, has a seasonal element to it as well. It looks like the Saudis want to maintain market share ahead of Chinese maintenance. This is a reverse of a recent price increase that the Saudis had imposed.
The move overshadowed a very supportive American Petroleum Institute report that showed a decent 3.09 million barrel crude oil supply draw but also a surprise decrease in gasoline supply. That draw probably indicates that the data that showed that gasoline demand was faltering was wrong. The API also reported a 716,00 drop in distillates.
Yet even though those numbers were supportive, there was still a disappointment that the crude oil draw wasn’t larger than the 3.09 million barrels reported. The whisper number had a pencil in of a drawdown of over 5.0 million barrels or in some cases even higher. Because of that disappointment, it is going to make the Energy Information Administration (EIA)weekly status supply report at 9:30a take on more importance than usual.
If the EIA shows similar numbers, we will probably get a muted reaction but if they can add in the whisper number on oil or get closer to a 5 million barrel draw, we more than likely will reverse overnight weakness and close higher on the day. We expect crude oil inventories to draw down significantly in the next few weeks according to JODI data at 1045.7 MBBL. They say that U.S. crude inventories rose month-on-month for the first time since March 2021. That is probably in part due to the U.S. SPR release.
OPEC plus Russia has ignored the Biden administration and has ignored their calls to raise production. At the last meeting, OPEC did raise production but they pretty much stuck to their script as they realize that the all omicron sell-off was probably short-lived and would have little impact on demand. Yet an interesting story today that came out of Reuters says that, “Russian Deputy Prime Minister Alexander Novak said on Wednesday that OPEC+ group of largest oil producers has resisted calls from Washington to boost output because it wants to provide the market with clear guidance and not deviate from policy.”
That is funny because I thought the reason they resisted calls from the Biden administration to raise output was that they did not respect this administration. I also thought it was because of the way the Biden administration called Russian President Vladimir Putin and Saudi Arabian Crown Prince Mohammad bin Salman murderers. While that may be true, it’s probably not the best diplomatic approach to get them to pump more oil and especially a questionable decision when your energy policy is to discourage US production and depend more on these alleged murderers for supply.
Reuters went on to say that OPEC and its allies agreed earlier this month to stick to their existing policy of monthly oil output increases despite fears that a U.S. release from crude reserves and the new Omicron coronavirus variant would lead to a fresh oil price rout.
But OPEC+ has regularly failed to meet its output targets, producing about 700,000 bpd less than planned in both September and October, the International Energy Agency (IEA) says. The next meeting of the OPEC+ Joint Technical Committee is scheduled for Jan. 3, while the next meeting of the OPEC+ Joint Ministerial Monitoring Committee is Jan. 4, a source said. Stay tuned – that should be a fun one!
Mexico’s Pemex made a declaration that they would end oil exports. The Mexican well company over the years has fallen short of its potential mainly because the government uses Pemex more as a political organization than an oil company. S@P Global Platts reports that Mexico’s Pemex plans to reduce crude oil exports to the U.S. to 435,000 b/d in 2022 and to stop it completely in 2023 as the state-run company increases its refining capacity to meet domestic fuel demand, CEO Octavio Romero Oropeza said Dec. 28.
The natural gas market is still being driven by the weather forecast. We ended December with heating degree days well below normal and even with that weakness and demand, the January natural gas prices were over $4.00. What that tells us of course is if we get into a more normal pattern of winter soon, natural gas prices could rally pretty hard. The global demand picture and record LNG exports from the US should keep the market supported but we all know that for natural gas Mother Nature has the last say.
While inventories may give us a bit of a correction this week, we think across the board for both oil and products as well as natural gas that you should continue to use weakness to put on longer-term bullish positions. Hedgers should get hedged because 2022 could be an explosive year for energy as the lack of investment in fossil fuels will keep the supply side extremely tight.