Monetary or Oil Policy
The oil trade will be torn between trying to follow monetary policy or oil policy. Do you believe that OPEC and non-OPEC members can agree to freeze production or do you believe that the Fed can raise rates this year? Who do you trust?
The chances for a rate hike went up after Fed President Bill Dudley told Fox Business Network’s Peter Barnes that the market is too complacent about a Fed rate hike in September. I give Mr. Barnes credit for not laughing out loud.
These comments stopped what seemed to be a freefall in the dollar and the market tried to believe that Mr. Dudley actually believed what he was saying. Yet despite these comments, oil stayed strong.
OPEC oil ministers, along with Russia, are going into diplomatic overdrive trying to lay the groundwork for a historic oil production “freeze” agreement. On that front, we saw the market get worried when it was reported that an Iranian press official said Iran hadn’t decided whether it would join other OPEC members in talks in Algeria at an energy conference scheduled to begin on Sept. 26.
That takes us back and reminds us how Iranian oil minister Bijan Zanganeh lack of attendance at Doha seemed to anger the Saudis and eventually led to Prince Salman torpedoing the agreement.
Tensions in Iran are high and there is already infighting over oil contracts post sanctions. Reports that minister of petroleum Bijan Zangeneh says Iran is about to make modifications to its new oil and gas contracts because many inside Iran say that the oil minister cut some bad deals.
The naysayers say the contract model has drawn parallels with Iran’s oil concessions to the UK under the 1901 D'Arcy agreement, which Iranians believe squandered their national wealth. The tensions may make it harder for Iran too look like they are giving into Saudi Arabia in a deal.
But will Saudi look beyond Iran? Iran is getting close to post sanction production levels and in the near term, there is not much danger in them exceeding the level that would be imposed on them in a freeze scenario.
The crude oil market will also look to inventories today. The American Petroleum Institute Report (API) reported 1.01 million barrel drop in crude supply. We also saw a big 680K drop in Cushing, Oklahoma. The drop was overshadowed by a 218-million-barrel build in gasoline supply and 2.41-million-barrel increase in distillate. The EIA will report and the trade will be looking at shale oil production for a gage on future direction of supply.
The oil market and natural gas may have some weather to contend with as well. Tropic depression number 6 is out in the Atlantic. Hurricane Pro HD says that the storm has 80% likelihood of becoming a hurricane in the next 2 days and a 90% chance over the next 5 days. It looks like it might be headed up the East Coast of the U.S. but it is still too early to tell. We will keep an eye on the storm this week and next.
We continue to believe that oil is at a long-term bottom. When prices were low we advised that traders put on long-term bullish positions. With the market rising 20% in the last two weeks there is no crime in taking some profits even though we believe that longer term there is more upside. As for natural gas major support is holding even though the demand could weaken. That may be priced in after last week’s big drop.