OPEC Surprise?
The OPEC meeting in Vienna just got a lot more interesting. Saudi Arabia and their new oil minister Khalid Al-Fali wanting to show its softer side and repair diplomatic damage done that the failed “Doha Initiative” is saying that the Kingdom will back an oil production ceiling at today’s meeting.
The new oil minister is making the proposal because it is clear that the Saudi’s did damage to their reputation as a reliable oil partner after the April meeting in Doha, Qatar. They brought OPEC and Non-OPEC members to Doha under the guise of signing a production freeze agreement, only to have the new Saudi power broker Crown Prince Mohammad bin Salman Al Saud threw a fit and pull the rug out from under former Saudi oil minister Ali Al-Naimi. That angered most of the parties at the meeting and the fall out after the meeting led to the firing of the long time oil minister Naimi. It created a distrust of the kingdom and angered their allies and foes alike.
The Russian’s, the big Non-OPEC player at Doha was particular incensed because the Saudi’s had courted Russia to work tighter and now they left them waiting at the altar. Russian Energy Minister Alexander Novak blamed OPEC states and mainly Saudi Arabia for “undoing two months of negotiations” by presenting demands on the morning of oil production freeze talks in Doha. Now the new oil minister Khalid Al-Fali is trying to mend fences with their wiliness go along with a production ceiling agreement if a consensus can be reached.
Already Nigeria, Qatar, Venezuela and Algeria said they were on board. Sounds promising? Well not so fast. The UAE said they would go along but only if Iran would join the ceiling. So it really comes down to Iran to determine if OPEC brings back any perception of production restraint.
Iran is not the type to go along just to get along. The Iranians are still bitter that fellow OPEC members showed little pity for Iran when they took their market share while they were under sanctions. Their historic rivalry with Saudi Arabia is at a low ebb with the two fighting proxy war in Yemen and Syria is making it even harder to separate oil policy with diplomatic policy.
The Iranian minister, Bijan Zanganeh, seemed to dismiss the idea of a production cap as it would have “no benefit” for Iran – or for the other members of the cartel but he is open to the idea of reinstating the OPEC Quota system. Mr. Zanganeh said that “One of our main ideas is to have country quotas, but I don’t think we can reach an agreement on this subject at this meeting.”
Or can they? The truth is that the difference between a production ceiling and a quota is not that far apart. Besides in the real world it might not change oil production but restore unity to a cartel that is in danger of falling apart. OPEC needs to regain the trust of Russia because they may need them in the future to boost or lower prices. Many in OPEC say that they missed a historic opportunity to coordinate output between OPEC and Non-OPEC members. To get Russia back on board the cartel is going to have to save face and show they can work with each other and then maybe they can work with others.
Oil will also look at the weekly inventory report. Based off the API we may see a surprise increase in crude inventory down in Cushing Oklahoma tempered the bullishness. What many traders will focus on is falling U.S. oil production that shows no sign of stabilizing and should continue to fall further. The API reported that Crude inventory rose by 2.4 million barrels but fell by 1 million in the delivery point in Cushing Oklahoma. They showed that gasoline stocks fell by 2.5 million barrels and distillates by 2.2 million barrels.
We also get today's natural gas inventory and we should see supply increase by about 88 bcf. Yesterday I wrote that we are awaking a sleeping giant and to go long in Natural gas options. We saw another big jump on weather and weather reports that should see solid demand in the near future! We are also seeing signs that U.S. production has peaked and has fallen below the critical 70 bcf per day level. Bentek reported that U.S. gas output fell to 69.8 bcf per day.
What that means if we see a hot summer record breaking demand will cause stress on power generation infrastructure and because of all of the retired coal plants we may actually see supply withdrawals in a season when they should be building. If that happens we could see this market get knocked out of its complacency and mount a significant rally.
I hope you have been enjoying my reports. As you know we have been very bullish on oil and that market has had an incredible run. We continue to talk about long term strategies and a generational bottom. I now believe that natural gas has hit bottom.