Beware: Small News Drives Big Moves In Today's Fickle Oil Market

On the early morning of July 18, the Financial Times reported that an oil market consultant told clients that Saudi Arabia would likely cut its exports by 1 million barrels per day in the near future. Bloomberg picked up this article and reported that, “Saudi Arabia is considering deeper export curbs.”

Oil futures immediately shot up by 2% after the news broke, even though the information is attributed to only one second-hand source. It has not been verified by anyone in an official capacity in Saudi Arabia or within OPEC.

Many analysts seem to believe these reports are responsible for the price jump. What we are seeing is less a signal of Saudi Arabia’s future plans and more a sign that this oil market is fickle and looking for any reason to move. Commodity markets are unpredictable, especially in the short-term and particularly when investors are anxious.

Major players can also affect the price of oil in not-so-obvious ways, even without increasing or decreasing production. Saudi Arabia, for example, has subtly altered its exports, which could have a significant impact on oil storage and usage data in the United States. Lately, in the summer, Saudi Arabia has been exporting around 1 million barrels of oil per day to the United States. In June that number decreased to below 1 million. It is expected to be even lower in July. However, this does not mean that Saudi exports decreased significantly, because at the same time, Saudi Arabia increased its exports to Japan.

Aramco owns a massive crude oil storage facility in Japan that it recently expanded. It is likely that these exports are filling up Japanese reserves there while giving the impression of decreased exports (to the U.S.) and creating a drawdown from U.S. storage.

Decreased Saudi exports to the United States along with the conclusion of U.S. government sales of oil from the Strategic Petroleum Reserve help magnify the summer crude oil and gasoline draws that the U.S. typically experiences during the height of the summer driving season. Low gasoline prices across the U.S. are continuing to stoke demand, so market watchers should expect to see data indicating draw-downs in U.S. crude oil stocks this week and in the coming weeks.

In the oil market, small changes and short-term data are not always what they appear. It seems one third of investors expect prices to rise, one third expect prices to drop, and one third expect prices to stay in the mid-$40 range. Investors are anxious, and the market—as well as any news about it—must be watched carefully.