Market Report & Analysis for 6/19/2018 Morning Edition
Morning Market Overview
Oil prices ended Friday’s trading session strongly lower notching the fourth weekly loss in value in a row. Clearly a message to OPEC and its non-OPEC participants to the production cutting accord as they start to arrive in Vienna for what will likely the be the most important OPEC meeting in a long time. The days leading up to the official OPEC meeting on Friday, June 22 will be filled with many side meetings between many of the accord participants with a plethora of 30 second news snippets hitting the media airwaves.
Market players will be embracing all news coming out of Vienna resulting in a high level of volatility and potentially wide and wild intraday price swings. We believe OPEC, Saudi Arabia, and Russia are heading down a slippery slope. Any increase in production now will likely be met with additional selling as there are still several variables on the supply side that OPEC has no control over. For instance, US crude oil production is likely to still grow but the growth rate could slow as logistics bottlenecks are continuing to evolve in the Permian producing region. In addition, although the US is planning on adding sanctions on Iran production from Iran is still running strong and has yet to start retracing. No matter how carefully a production increase is worded the market will quickly see through it and simply view as more oil hitting a market that is not currently required with global inventories just hovering either side of the five-year average.
Higher production will likely put a damper on the longer-term inventory destocking pattern that has been in play. With the spot Brent contract already over $7/bbl off its high (hit third week in May) and the market sentiment biased to the bearish side the optimum course of action for OPEC and Russia is to simply walk away from the meeting with a status quo conclusion with further production discussions scheduled for the next meeting in late fall.
That will allow the market to digest what if anything will be the outcome from sanctions on Iran as well as the situation in Venezuela. It will also buy time for OPEC to see how US production evolves with logistics bottlenecks evolving in the US. Friday afternoon the latest Baker Hughes data hit the media airwaves reporting the number of rigs deployed to the US oil sector increased last week by 1 rig after increasing marginally during the previous week.
The latest rig data continues to support the view that the uptrend in the US oil rig count may be stabilizing and possibly topping out. Total rigs deployed to the oil sector are higher by 116 or 15.5 percent year over year. Total US crude oil production is about 17.9 percent above where it was for the same week a year ago. This week’s production came in at 10.900 million bpd.
