Formal Affair
I'm puttin' on my top hat, tyin' up my white tie, brushin' off my tails. I'm dudin' up my shirt front, and puttin' in the shirt studs, polishin' my nails. I'm steppin' out, my dear, to breathe an atmosphere that simply reeks with class. And I trust that you'll excuse my dust when I step on the gas. For I'll be there puttin' down my top hat, mussin' up my white tie, dancin' in my tails for OPEC’s formal affair.
Crude oil prices surged yesterday from monthly lows as the so called informal OPEC meeting at the International Energy Forum conference in Algiers on Sept. 28 is now suddenly a formal OPEC affair. That means the likelihood of a major policy announcement at this meeting has gone up dramatically. With all of the major policy players from Russia, Saudi Arabia and Iran suggesting that a deal is going to get done, it means that a deal is going to get done.
Oil received even more support after the American Petroleum Institute shocked markets by reporting a 7.5 million barrel crude oil draw as supply gets diverted and Venezuelan output falters. To add to the energy excitement, natural gas traded above $3.00/MMBtu for the first time since May. If that isn’t enough for you, we get the weekly Energy Information Administration (EIA) petroleum status report and oh yes, I think there is a Fed meeting.
Let's start with the historic OPEC non-OPEC accord. Russia’s oil envoy suggested that a one-year deal to test the waters on a production freeze was on tap. Bloomberg News reported that Russia was in favor of a pact that would help oil price stabilization and a potential 1-year agreement “meets this criteria,” Interfax reports, citing Vladimir Voronkov, Russia’s envoy for international organizations based in Vienna.
OPEC Secretary-General Mohammed Barkindo also said that Iranian officials have told him they are committed to negotiating. We know that Saudi Arabia is backing a deal because they were the ones that restarted talks after they screwed up the Doha accord in April. I was in the minority when I said a deal would get done and it looks like we will be right.
Oil also got a boost from a report that India imported a record amount of oil. India imported 4.4 million barrels of oil a day in August and it looks like that number will rise. As I have said before, India is the new China when it comes to oil demand growth. Now it seems that India will import more oil as it, like China before it, wants to build a strategic oil reserve.
Reuters is reporting that India is set to buy 6 million barrels of Iranian crude for its strategic oil reserves as negotiations with the United Arab Emirates' national oil company for supplies are stuck over commercial terms, industry sources said. Reuters says that India, seeking to hedge against energy security risks as it imports about 80 percent of its oil needs, is building emergency storage in vast underground caverns to hold a total of 36.87 million barrels of crude, enough to cover almost two weeks of demand.
The API also is causing a bullish stir as it reported a 7.5 million crude oil drawdown! If the EIA confirms, that means US oil supply has fallen close to 21 million barrels over the last 3 weeks. The API also reported that gasoline supply fell by 2.45 million barrels and distillates rose by 1.42 million barrels.
In natural gas we are seeing a surge and the warnings about supply that I spoke about in my webinar are now coming to fruition. With record demand predicted in the coming weeks, along with talk of falling production, our surplus going into winter will continue to diminish. With talk that US production is dipping below 70 bcf a day and the surplus dwindling, traders are starting to worry about the amount of supply we will have going into winter.
When we started the refill season, supply was 54% above average and that has fallen to just 9%. With record demand expected we could see supply tightness start to happen if we get a cold winter. The hedge funds are getting long as this they are seeing the writing on the wall.
The Fed meeting could impact prices and add to volatility. If the Fed shocks us and raises rates, look for oil to break but then think about buying that break. The long term bottom is in, or at the very least we will defend the lower end of our trading range. With over 20 million barrels in supply gone in recent weeks and demand near record highs, it seems we are getting closer to market balance.