A slowing economy and low liquidity are giving oil futures a dog day of summer slide. Even reports that the Biden administration is going to toughen up sanctions on Iran ahead of talks are being ignored because the trade realizes that the move is just a move by Biden to try to look tough ahead of renewed Iranian nuclear talks. Some traders are pointing to the risk-off attitude because of concerns about House Speaker Nancy Pelosi’s trip to Taiwan as China has made threats against the third in the line of succession to the President of the United States. While that may be causing some concern, it really seems to be the lack of enthusiasm within the U.S. in a technical recession and global economic data that is less than spectacular.
Yesterday, The Institute for Supply Management’s index of U.S. manufacturing activity was 52.8 in July as a drop in new orders signaled declining demand for factory products. That was its lowest reading since June 2020 and down from 53 the prior month, according to the Wall Street Journal.
Oil prices are also cautious ahead of the OPEC Plus meeting. There has been some speculation that perhaps OPEC and their favorite coconspirator Russia, might engineer a surprise and increase production more than what they originally had agreed upon. Reuters News reported that eight OPEC+ sources spoken to by Reuters, two said a modest increase for September would be discussed at the Aug. 3 meeting, and five said output would likely be held steady. This comes on reports yesterday that Libya lifted its force majeure on its oil production and exports, with the Oil Ministry and the National Oil Company (NOC) now saying that production has reached 1.2 million bpd–the level it was at prior to the declaration of force majeure in April.
Joe Biden has been raising expectations that OPEC was going to give us something in return for his historic fist bump visit to Saudi Arabia and hanging out with Crown Prince bin Salman. According to Bloomberg News:
“OPEC+ could formally agree to continue with the monthly increases of about 400,000 barrels a day it has adopted over the past year, with the understanding that only part of this would be implemented because of several members’ capacity constraints. The group is collectively pumping about 2.8 million barrels a day below its collective target.”
So what we’re saying, in reality, is that any talk or an agreement by the OPEC cartel to raise production will only be modest and only an olive branch by Saudi Arabia to the Biden administration in return for warming relations. Even if Saudi Arabia can follow through and promise a few more barrels of oil, it’s still going to be insignificant in the whole scheme of things.
In reality, the market action for oil seems to be adjusting to slowing demand, but we believe they are going to be surprised in just a couple of weeks because we believe the demand destruction argument it’s not going to be as bad as the market thinks it’s going to be. Yes, the manufacturing data from the United States yesterday was disappointing but stays still in expansion. The job market is slowing, but there are still more jobs available than people looking for work. The Wall Street Journal reported that U.S. job openings are estimated to have remained robust in June while easing from higher levels earlier in the year amid a broader economic slowdown.
Economists surveyed by The Wall Street Journal estimated the Labor Department will report there were 11 million openings in June, down from the record of 11.9 million in March but still historically high. Dante DeAntonio, an economist at Moody’s Analytics, estimated that job opening fell below 11 million in June. The Labor Department will release its estimate of June job openings and the number of times workers quit their jobs on Tuesday at 10 a.m. E.T.
At the same time, global oil inventories are very tight despite the fact we’ve seen record releases from the global strategic petroleum reserves. The question markets are going to have to answer is what’s going to happen when the global strategic reserve releases end in October, just ahead of winter. Javier Blass of Bloomberg tweeted out:
“U.S. released 4.6m barrels from the SPR last week (~660,000 b/d), the smallest weekly release since late April. All the barrels released were sour. Crucially (for the first time ever?), there are more sweet barrels left inside the SPR than sour: 235m vs. 234.9m.”
Natural gas prices dipped to key support yesterday near 776. They’re pulling back again today and volatile trade in a market that is focused on the weather but also on the Freeport LNG export terminal. Reporters seem to suggest that the Freeport LNG terminal will start to reopen in October, which means that US LNG will start making its way to Europe ahead of what could be a very challenging winter for the European continent.
The Business Insider Zahra Taye reports that the European natural gas crisis is getting even worse, according to Bank of America. In a Monday research note, the investment bank highlighted Russia’s actions to limit supply to the region, adding that winter stockpiles could run low. “The European gas situation is quickly moving from our ‘bad’ to our ‘ugly’ scenario in the past month,” the bank said.
Russia has shaken energy markets since it invaded Ukraine and, more recently, jolted Europe after cutting the supply of natural gas to the region. In July, Russia’s state-run energy giant Gazprom (MCX:GAZP) slashed flows to just 20% along the Nord Stream pipeline, a week after it cut flows completely for a 10-day maintenance period. Russia is Europe’s largest individual energy supplier and accounts for 40% of the region’s natural gas consumption.