It has been a hot, challenging summer for Saudi Arabia. Not only are they fighting battles in Yemen, Libya and Iraq, they are also fighting a struggling domestic economy at home. A rise in Saudi Arabian oil production and an increase in crude supply, according to the American Petroleum Institute (API) report, is giving oil a little weakness to start the day and the Saudi production story is raising questions about whether or not OPEC can cut a deal with Russia to “freeze” oil output at current levels.
Reports that Saudi Arabian oil production hit a record 10.67 million barrels a day helped weaken the market but really did not have that significant of an impact on Saudi oil exports. Hot temperatures in the Kingdom has caused the Saudi domestic supply to fall, forcing the Saudis to raise production to meet domestic demand. Still, the Increase may make it harder for OPEC and Russia to come to a deal to freeze production because the Russians still feel that OPEC burned them once before. Also the Russians may not want a deal as they have had some success taking some market share away from Saudi Arabia's biggest customer, China. Russian oil output rose 1.8 percent in July to 10.85 million barrels a day. That is why Saudi Arabia has been cutting prices on Asian crude to try to regain that foothold. At the same time, they have to keep the lights on at home where the economy is forcing the kingdom to ask for more money from their subjects in the form of higher taxes and utility rates. Something that many Saudis are not used to.
Crude oil is also getting pressure from last night’s API report that showed a 2.09-million-barrel increase in crude supply last week. We also saw a 1.25 million barrels increase in the Cushing, Oklahoma delivery point. Yet what is offsetting that build is a substantial 3.95 million barrel drop in gasoline supply and 1.56 million barrel drop in distillate supply. That dollar weakness should provide support and give oil a chance to rally. The drop in the dollar is reigniting the metals rally as well as gold and silver are bouncing but palladium is soaring. Already facing a supply demand deficit, mine strikes are causing a major spike. This will be one to watch.
Shale oil producers are doing a bit better according the Energy Information Administration’s closely watched Short Term Energy Outlook. The EIA said that, “After a steep drop over the past year in U.S. oil production, a recent uptick in the number of rigs drilling for oil is expected to contribute to more steady monthly oil output starting this fall.” “Domestic monthly oil production is expected to begin consistently rising in late 2017 due in part to higher forecast oil prices and improvements in drilling productivity.”
Good news for gas! The EIA says that, “U.S. regular-grade gasoline prices are currently at a 16-week low and are expected to continue falling to a monthly average of less than $2 a gallon by the end of the year.” “High gasoline production is leading to motor fuel inventories that are the highest on record for this time of year, which is helping to keep prices down at the pump.”
Not hot enough for natural gas. The front end of the natural gas market got crushed on this perception despite record demand and we will see supply stay at record highs. Still, we could rebound again as we are still on a path to subpar injections the next few weeks. The Energy Information Agency says that natural gas, "Despite the recent rise in natural gas prices, hot weather across the country is leading power plants to pull more natural gas from storage this summer, with the amount of electricity generated by natural gas to meet cooling demand reaching a record high in July.” Natural gas inventories were drawn down in the last week in July for the first time in 10 years during the June-August period, when gas stocks normally increase.”
Electricity: “This summer’s hot temperatures are behind the expected 3% increase in electricity sales to the residential sector compared to last summer.” Coal: “U.S. energy-related CO2 emissions from fossil fuels are expected to average less than 5.2 billion metric tons this year, the lowest for any year since 1992. The drop in CO2 emissions is largely the result of low natural gas prices, which have contributed to natural gas displacing a large amount of coal used for electricity generation.” Renewables: “Wind power is expected to account for about 6% of total U.S. electricity generation next year, while solar power’s share will be about 1%.”