The Energy Report: Slammed Dunk

Oil prices are getting slammed on concerns that the Chinese economy hit a brick wall, talk that OPEC won’t back up the tough talk by Saudi Arabia, and the possibility that the US might be working towards a plan that could lead toward the lifting of some sanctions on Iran.

Chinese economic fears grew after it was reported that China’s official manufacturing purchasing managers’ index (PMI) fell to 48.8 in May from 49.2 in April, while the non-manufacturing gauge fell to 54.5 from 56.4. That caused a big drop in Asian and European stocks and fed the narrative that Chinese record oil demand may be coming to a halt. There has been a weaker physical market in recent days, along with suggestions that Saudi Arabia will lower its official selling price to Asia to regain market share from those rouge Russian barrels of oil. Yet it wasn’t just oil that got slammed, it was grains and industrial metals as the data is suggesting not to believe your eyes but get prepared for a slowdown anyway.

The weakness raises the stakes for the OPEC cartel after the Saudi oil minister Prince Abdulaziz bin Salman told speculators to “watch out.”  Yet major banks are saying that OPEC will stand pat and just make official voluntary cuts. That news put further downside pressure on prices and it also will put more focus on the Saudi-Russian relationship.  Will we get a surprise cut or will we see the breakdown of the OPEC Plus alliance that could lead to another production war. I would say be prepared for a surprise cut as OPEC’s credibility is on the line.

The AP reported yesterday that Iran’s state-run news agency claimed Tuesday that international inspectors had closed off two lines of inquiry they had over Tehran’s nuclear program ahead of a scheduled quarterly report by the United Nations’ nuclear watchdog. The Vienna-based International Atomic Energy Agency, however, did not respond to questions over the report published by Iran’s state-run IRNA news agency. Citing “knowledgeable sources,” IRNA said that the IAEA had closed off its inquiry over the recent discovery of traces of uranium enriched up to 83.7 percent purity. A quarterly IAEA report in March said inspectors found the particles in Iran’s underground Fordo nuclear site, further raising nonproliferation concerns as weapons-grade material is enriched to 90%. This along with reports that the US is working with South Korea to free up sanction money for Iran should be watched. This could be a plan to restart the Iran nuclear talks yet again.

The debt ceiling drama is not helping but recent disappointments in the Chinese economy and market weakness due to bank failures in the US has tempered down oil price expectations. Reuters reported,  “Oil prices will creep up from current levels as major producer group OPEC+ maintains restrictions on supplies, but economic headwinds will keep them below $90 a barrel this year, a Reuters poll showed on Wednesday. A survey of 43 economists and analysts forecast Brent crude would average $84.73 a barrel in 2023, down from the $87.1 consensus in April and current levels of around $73. Most analysts expect oil to trade around the $80-level per barrel this year, with data and analytics firm Kipler noting that, “macroeconomic concerns are a major driver of crude prices this year, overshadowing relatively tight fundamentals.”

The question is will supplies get tighter regardless. Massive crude draws in the US should be easier a bit with the possibility of our first crude supply increase in weeks. Gasoline demand over the holiday weekend was reported to be slow while air travel surged to the highest level since 2019. We won’t get the whole story in this report but regardless, supplies will stay near multi-year lows.

Natural gas also took a hit on the commodity selling. EBW Analytics reported, “Natural gas collapsed lower into June contract final settlement last week, posted sub-$2.00/MMBtu spot pricing over Memorial Day weekend, and July continued selling off on Tuesday as it assumed the NYMEX front-month role. Near-term technical remain bearish and fundamentals lackluster. Elevated production, subdued LNG, and cooling demand reverting lower may enable the storage surplus to approach 400 Bcf above five-year norms into late June. While our long-term storage trajectory is sharply lower and the medium-to-long term fundamental outlook points to upside price potential, natural gas may have to muddle through a near-term soft patch in coming weeks first.