Oil traders take pause ahead of oil inventories as angst about the December, 10 meeting between OPEC and non-OPEC nations this coming Saturday take hold. While some are worried that somehow this meeting will derail the recent OPEC production cut accord, the Saudis say they, "absolutely expects non-OPEC producers to reduce their production.
To accentuate the point, the Saudis may have sent a subtle message to other producers when they decided to cut the price of oil to their Asian customers. Is this a sign from the Saudis that they still could act to maintain market share?
The news that Saudi Aramco cut January’s official selling price for Arab light crude to Asia by $1.20 a barrel or a to a discount of 75 cents a barrel to the benchmark as reported by Bloomberg, sent a signal to non-OPEC producers that the Saudis have significant sway over prices. If non-OPEC producers fail to adhere to cuts then the Saudis will use their production to crash prices again. What is very clear from the recent oil price swings based on OPEC production cut negotiations, is that if this deal falls apart then oil could drop $10.00 a barrel and there is not one non-OPEC producing nation that wants to see that.
The meeting will take place in Vienna on Saturday and OPEC has invited non-OPEC countries Russia, Colombia, Congo, Egypt, Kazakhstan, Mexico, Oman, Trinidad and Tobago, Turkmenistan, Uzbekistan, Bolivia, Azerbaijan, Bahrain and Brunei to get a commitment on hard numbers for a production cut. Russia has already said that they will reduce their output gradually by 300,000 barrels a day and they expect that OPEC will show signs of compliance and will also see modest cuts from the rest of the non-OPEC nations. While some see this as a threat to the deal, it would be unlikely at this point for the other non-OPEC producers to back out.
OPEC says their goal is to reduce global inventories. OPEC secretary general says they want to see global oil inventories at the five year average, not more and not less. That is a very bullish goal as OPEC is predicting that demand for oil will be above the five year average. That means inevitably inventories at the five year average will be bullish because it will cover less days of demand.
We have already seen the OPEC decision impact gasoline prices at the pump as prices have risen every day since the decision was made. AAA said yesterday that the national average price of regular unleaded gasoline has increased for seven consecutive days, reaching today’s price of $2.18 per gallon. Today’s average price represents an increase of five cents per gallon compared to one week ago, four cents less than one month ago and 14 cents more than the same date last year.
Natural gas prices went on a tear as winter realities start to settle in, hitting the highest prices since December 2014. The price spike hits as a polar front may grip much of the nation at a time when demand is rising and production stalling. Dow Jones said it best when they reported that active drilling rigs heading into this winter are at a record low in the 29-year history of the Baker Hughes rig counting. And we are at a time when generation of coal-fired power plants is also closing and the amount of gas as they replace coal. Exports are rising, too, and with all that demand, there just isn't enough drilling to keep supplies as high as they have been in the past year. We are one of those analysts that have been reporting on the same.