Outside Forces
OPEC resisted outside forces and pressure from President Donald Trump to not cut production only to have oil falter from outside market forces. Originally oil soared almost 4.5% on the OPEC production cut news. Fears that Russia would not join cuts and that Iran was a sticking point went away, as they agreed to cut production by 1.3 million barrels. Reuters is reporting that Saudi Arabia’s crude oil exports are expected to drop next month by some 1 million barrels per day (bpd) from November levels. Now add in the fact that Alberta Premier Rachel Notley has announced a temporary 8.7 per cent oil production cut, or decrease of 325,000 barrels a day, puts the total reduction to 1.6 million barrel per day.
Yet, it’s all starting to unravel on outside pressure from a weakening stock market and outside macroeconomic fear forecasts. The sell-off came shortly after a speech by St. Louis Federal Reserve bank president James Bullard who suggested that the Fed should take a pass on raising rates in December. That sent a signal to the market that if the Fed paused, then maybe things in the economy are already worse than they seem to be. Up until then, oil traded to ignore China trade war fears. Yet over the weekend those fears are heating up, adding to falling oil demand expectations.
The arrest of Huawei Technology Co Ltd (SZ:002502) Chief Financial Officer Meng Wanzhou still is rattling markets. Over the weekend China recalled the U.S. Ambassador to China, Terry Branstad, in a protest over the arrest and said it will take “further action” if needed. That raised fears that the progress in the trade war would be lost and have us set in for a cold winters nap.
Yet from the supply side oil cuts will matter especially if the slowdown fear is being overstated. We saw U.S. oil rigs fell by 10 rigs, the biggest weekly drop since May of 2016. U.S. oil inventories plunged last week and should fall again.
Gas prices continue to fall. Trilby Lundberg of the Lundberg survey reports that the retail pump price dropped 22 cents in the past three weeks to $2.51, and it's down a whopping 40 cents over three months. The pain from low oil prices, felt by producers over the past few months, is certainly shared by U.S. refiners because they lost gasoline margin yet again - and by retailers too, who have now given up more than 8 cents of their gasoline margin but are still in the pink.
Now that the production cutback agreement among OPEC and several non-OPEC members to remove 1.22-mmb/d from world supply for January 2019 has been struck, bringing a modest bump in oil prices, refiners are on edge. They have long resisted hiking wholesale gasoline prices to stop the margin bleeding that even comparatively stronger diesel fuel prices can't make up for. As for retailers, they may well have to give up another chunk of gasoline margin to chase sales whether crude oil prices hold or not and whether refiners raise wholesale gasoline prices or not.
Trilby says that If motorists keep winning, by getting some further pump price cuts, there's a silver lining for refiners and producers embedded: price-happy motorists may well usher in some genuine gasoline demand growth, indirectly feeding everyone upstream. The current retail price is, for a change, below its year-ago point: It's a four-cent discount, another tidbit in favor of gasoline demand.