OPEC Plus is at a major turning point in oil history, and this might be remembered as the day the cartel took back control of the global oil market from the United States.
The U.S. shale revolution revolutionized not only the United States economy but rewrote the global energy world order putting OPEC on its heels and changing the group from an all-powerful cartel that could control oil prices to a group that was fighting for oil market share and fighting for its very existence.
Yet inexplicably, the United States started to turn its back on its own U.S. oil and gas industry. The Biden administration actively re-did what it could to reduce U.S. oil and gas production with new regulations and discouraging investment. Now OPEC is showing that they are back in charge and are going to dictate what happens with the global oil supply.
Early reports show that the United Arab Emirates has backed off its opposition to a bigger-than-expected production cut and will go along with Russia and Saudi Arabia with a potential 1.8-to-2-million-barrel cut. Because OPEC is under production, it probably will mean a real cut of 1.3 to 1.1 million barrels a day. Regardless, this is a major production cut, unlike anything we’ve seen before COVID, and will have a major impact on prices this winter.
All this OPEC drama overshadowed the fact that the American Petroleum Institute (API) reported a wildly bullish weekly supply report. The API reported that the crude oil supply fell by 1.770 million barrels. Gasoline supplies are down a whopping 3.474 million barrels and may be one of the reasons why we saw such a huge surge in our RBOB gasoline prices yesterday. Distillates also plunged by 4.046 million barrels, and Cushing inventories increased by 925,000 barrels.
This report will put more pressure on the Biden administration. Yes, they have to make a grand decision on how to respond to OPEC and their production cut. The administration has already said they will not consider additional releases from the Strategic Petroleum Reserve. That’s probably a no-brainer because, let’s face it, they’ve drawn down inventories about as far as they possibly can without creating a major disaster for the country. Now there is active talk about banning oil and product exports from the United States. That is only going to serve to create shortages in the U.S. because retaliatory measures that will be taken will leave many states in the union short of supply in California. Are you ready for $20 a gallon of gasoline? You’ll find out if we get an export ban.
This OPEC production cut is the reason why it’s so aggressive, not only as a slap in the face to the Biden administration but also to Europe for putting a price cap on oil and gas. I am sure OPEC is not very happy about that. It does disrupt the market, and on top of that, I think it also creates a situation where OPEC feels like they’re being singled out for Russia’s errors. I think, at this point, a price cap is going to be counterproductive.
At the same time, I think the Biden administration and their SPR releases are another reason why OPEC is aggressively cutting production. Biden’s vow to make Saudi Arabia a pariah insulted the country. You even have California Representative Ro Khanna calling them a third-rate nation. Is it any wonder why Saudi Arabia doesn’t jump when the Biden administration tells them to? So much for Biden’s fist bump with Crown Prince bin Salman, the fist bump heard around the world.
The Business Insider reported that Saudi Aramco (TADAWUL:2222) CEO Amin Nasser said Tuesday that the world is misreading the oil market. He says that current crude prices indicate that the market is focused “on short-term economics rather than supply fundamentals,” he said. Nasser also reiterated warnings that a pick-up in economic activity would erase spare oil production capacity. The world misinterpreted the oil market by worrying too much about a potential recession in the near future, according to Saudi Aramco CEO Amin Nasser. Current oil prices indicate a focus on “short-term economics rather than supply fundamentals,” he told the Energy Intelligence Forum in London on Tuesday.
The Saudi CEO makes a great point. The poorly planned green energy transition has caused massive underinvestment in oil and gas supplies leaving the world short. Today could be that turning point that gets us into a very strong secular bull market. Even with all the bullish news in the short term, we still have to worry about the value of the dollar and what the Federal Reserve may or may not do in the future. But in the short term, we believe that this market is definitely in a buy breaks mode. Prices should spike if the Energy Information Administration report is similar to what we saw from the American Petroleum Institute.
Natural gas had a bit of a recovery yesterday after some weakness due to seasonal factors. EBW Analytics reports that near-term fundamentals remain starkly bearish, with the production surge extending to fresh records to start October while LNG feedgas demand plunges 2.0 Bcf/d amid maintenance outages at Cove Point and Sabine Pass. Particularly weak spot pricing at Henry Hub, including deals done as low as $5.380/MMBtu on Monday, may indicate lingering near-term softness ahead.