The Saudis continue to ramp up their crude oil exposure in the refining end of the fuel spectrum. Traditionally, Saudi Arabia functioned more in the upstream space chiefly providing crude exports to be refined. We have touched on the Saudi's intent regarding developing their own refining process and Friday this was confirmed to some extent in a Reuters story about Saudi Armco, the state run oil company, luring away engineers from Asia's struggling refining states in an effort to further ramp up her refining capacity with a purported goal as high as 10 percent of global refined products.
This could be looked at as the most direct evidence of the grand plan of the Saudis that seems to indicate that the decline in energy prices was, as suspected, a move to garner more market share. While this is a widely accepted notion, most were assuming it was designed to put pressure on the US shale market and regain that recently lost crude oil business. It now seems to be that the goal was significantly more robust as the Saudis attempt to place not only a firmer grip on the upstream crude supply but also have used the price decline to weed out weaker competitors and garner a large portion of the downstream refined sales.
In a possible rebuttal to this move by the Saudis, the US is starting to show signs that is may have intentions to reduce or repeal completely the ban on US crude oil exports. The now forty year old ban has come under scrutiny as of late as the price war has forced some US shale producers to reduce production due to negative cost effectiveness and lack of storage capacity. Should the US move to allow shale producers to export crude (US producers can export refined products with some limitations), particularly ahead of the possible removal of Iranian sanctions as a result of the nuclear discussion set for June 30th of this year, then we could see some move towards parity between the inflated Brent crude price and the US WTI crude.
Inventories did not stick to the script set forth by the Thursday's API data. WTI crude showed a decline in supplies for the forth week in a row with gasoline inventories lower as well. This produced a modest rally from what was about a two week low in WTI pricing, trading from 57 dollars to 58 and higher. However, all this has accomplished is to push the price discovery back right into the middle of the range, just as it looked as if we may see a breakout to the downside.
Natural Gas showed a strong build in inventories with 112 BCF reported versus the expected build in the mid 90s. The price traded sharply lower a day after June contract expiration, pushing the July contract back below 270 for the first time in three weeks as it breached trend line support from the previous breakout higher.
Nonetheless, there appears to be strong value at this pricing, a mere 15 cents of the recent low, that could be the catalyst for another run higher in the coming month should we see any bullish developments from either the supply side (inventories) or the demand side (weather).
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