Overshadowed
The oil market overshadowed the “transparent” Fed with a spectacular drawdown in crude oil inventory. Also signs that OPEC is close to a deal to freeze production and an oil worker strike in Norway all added up to a volatile day in energy.
Despite the Fed rhetoric about making sure traders knew that this was a “live meeting” and that a rate hike was possible, the market knew better. Despite the biggest amount of Fed dissension since December, 2014, the Fed failed to act. And despite the proclamation by Fed Chair Janet Yellen that she fully expects that Fed will raise rates this year, one might wonder why some might still be skeptical.
While we saw markets react to hawkish Fed transparency talk in the past, especially and most notably, by Fed Vice Chair Stanley Fisher, the lack of action by the Fed shows that either Fed officials are outright lying about their intentions, or they just say stuff to manipulate the market and shake out the froth. The three Fed dissenters, Esther George, president of the Kansas City Fed, Cleveland Fed president Loretta Mester and Eric Rosengren, head of the Boston Fed, will not be voting in the future.
Of course, Mr. Rate Hike big talker Stanley Fischer failed to back up his big talk with a dissent vote. That really raises questions about his credibility and his market intentions. All I can say is I am happy that Fed chair Janet Yellen said that the Fed is not political. I feel so much better. So post fed, despite increasing odds for a December rate hike, the rest of the curve is pricing in lower for longer so now perhaps oil traders can get back to oil market fundamentals. Well at least until some other Fed official opens their mouth.
So for oil, that means the trade has got to come to grips with a historic back to back drawdown in crude oil supply that saw oil supply fall by 6.5 million barrels this week following a 14.5 million barrel drop last week. While we know that some of this drawdown is tropical storm and hurricane related, there has to be more to the overall story. We know that most of the drawdown was in the Gulf Coast so it is possible that we may see some tankers off load next week but we were supposed to see that happen this week. We can’t blame US oil production because it actually increased last week.
It is likely that we are seeing a combination of factors accounting for the big draw. The weather is a big a factor as the Atlantic has been a hot bed of storms. We are also seeing the impact from falling Venezuelan production as the Venezuelan socialist government collapses.
Oil supply is also finding its way to Asia instead of going into storage on the Gulf Coast as we have seen record demand in India and near record high imports in China. As far as predictions that we would see the US run out of places to store oil, it looks like that won’t be a problem as the Cushing delivery point is only 85% full and there seems to be plenty of storage available on the Gulf Coast.
The Colonial Pipeline is restarting and futures already reacted two days ago on that expectation. A Libyan tanker sailed from Libya with crude cargo bound for Italy after a halt in fighting between rival armed forces enabled the OPEC country to resume exports from its third-largest oil port for the first time since 2014 according to Bloomberg.
Reuters reports that more than 300 Norwegian oil service workers went on strike on Wednesday after wage talks broke down, hitting operations of five large subcontractors to the country's oil and gas industry, the Industrial Energi trade union said. The conflict will force oil firms to halt drilling some wells on Norway's continental shelf and may later hit output from western Europe's top crude and gas producer, the union and companies said.
In the meantime, it looks like a production freeze agreement is moving forward as reports surface that Saudi Arabia and Iran will meet ahead of the meeting to iron out any differences so we don’t have a blowup like we did at Doha in April. Qatar is acting as the go between.
The UAE is wondering if OPEC is moving too fast in formalizing the meeting on September 28th but in the end will probably go along with what Saudi Arabia wants. In the Bloomberg survey, I am one of two analysts that predict that we will get a deal and the signs are signaling that I will be right.
Natural gas continued its winning ways as production is falling and demand is near records. Today we will see another below average injection and see our supply surplus dissipate. Look for a 55 injection today.