Market Report & Analysis for 5/30/2018 Morning Edition
Morning Market Overview
The refined products complex continues to get battered this morning. Liquidity in the oil and financial markets was below normal Monday as the US was closed in observance of the Memorial Day Holiday. US oil inventories will be delayed by a day with the API data released Wednesday afternoon and the EIA data hitting the airwaves at 11 AM on Thursday.
The oil complex ended the week with a bearish undertone as talk continued around the media airwaves about OPEC increasing production to offset any potential losses from new sanctions placed on Iran and any further losses of production from Venezuela. This appears to be the main topic that will be discussed at the June 22 OPEC meeting in Vienna. This is a big topic shift as just a few weeks ago the main topic that was quoted around the media airwaves was a permanent extension to the production cutting accord. OPEC and their non-OPEC partners have accomplished a monumental task in keeping a high compliance level for the production cutting accord resulting in the global oil inventories destocking to the five-year average level and in many locations overshooting and moving below the objective level. Total stocks in the US and OECD are now below the five-year average. This has resulted in oil prices moving higher over the last year or so with the spot Brent contract trading above the $80/bbl level for a few days prior to the talk of a production increase.
Although OPEC is planning on discussing a production increase as mentioned above at the June meeting we believe the most important issue facing OPEC is how are they going to maintain an oil price trading range that will provide an acceptable return on their asset. If they move back into the mode of a free for all inventories will almost certainly start to build with the forward structures moving back into a contango sending prices into a sustainable downtrend.
We are expecting OPEC to be very careful as to what they say and how they approach increased production going forward. They will need to add production on an as needed basis to maintain global inventories around the five-year average without risking an overshoot to the upside. Friday afternoon in the latest Baker Hughes data hit the media airwaves reporting the number of rigs deployed to the US oil sector increased strongly last week by 15 rigs after coming in unchanged during the previous week. Total US crude oil production is about 16 percent above where it was for the same week a year ago. This week’s production came in at 10.725 million bpd.
