The Energy Report 06/11/19
Oil did its now famous Monday swoon as Russia seemed to waffle on its commitment to OPEC production cuts, and private data intelligence services are suggesting another big increase in Cushing Oklahoma crude oil stockpiles. Oil prices started to get weak as Russia was seemingly playing hard to get when reporters tried to tie them down about an extension of the OPEC plus one production cut agreement. Russian Energy Minister Alexander Novak said on Monday he could not rule out a scenario in which oil prices could fall to $30 per barrel if the global oil deal was not extended, not exactly what the market wanted to hear. Novak also failed to commit to an extension of the cuts even though he said that there was a risk of oversupply in the market. The Saudi Energy Minister Khalid al-Falih said on Monday that Russia was the only oil exporter still undecided on the need to extend the output cuts. Of course, the Russians like to play this “Cossack Dance” with OPEC, keeping the cartel and the market guessing to the last second. So far, every time Russia has played this game, with the blessings of Russian President Vladimir Putin, they came to the table and went along. The Russians want to show how much power they have on OPEC and ultimately the global oil market! This is the kind of stuff that gets Vladimir excited.
And it is critical for the market to extend those cuts. Even though OPEC and Russian compliance to the cuts is outstanding and OPEC’s oil production dropped 170,000 bpd to 30.09 million bpd from April to May—the lowest level since February 2015, according to S&P Platts, U.S. production at a record 12.4 million barrels a day and global oil demand fears are creating challenges. Those fears became more acute after Oil Intelligence surveys reported another big crude increase in Cushing Oklahoma. The most famous is Genscape, which according to sources reported that Cushing storage hit 55,353,904 million barrels, that is up 1.970 mb from its May 31st reading and up 1,112,359 million barrels from their June 4th reading. Other forecasters also showed a build of over 1 million leading to many analysts to change their expectations of a crude draw to a crude oil increase for this week’s Energy Information Administration status report. Traders are still asking about the EIA’s huge upward revisions in oil supply, and now with data showing a rise in Cushing, they have reasons to back off even though U.S. imports this week should be down big and U.S. exports should be up. The American Petroleum Institute will get their say tonight at 3:30 pm CST. We still believe that we should see draws even with the increasing supply at Cushing. The only thing we have to fear is the EIA adjustments itself.
Bloomberg News is reporting that “The Trump administration is weighing sanctions against the Iranian financial body set up as a go-between for humanitarian trade with Europe, a move likely to sever the economic and humanitarian lifeline that France, Germany and the U.K. have sought to create for Tehran. The U.S. measures would target the Special Trade and Finance Institute, which Iran established as a counterpart to the European mechanism known as Instex, according to a senior administration official who asked not to be identified discussing internal deliberations. The official said the STFI is essentially an extension of Iran’s central bank, which already is covered by U.S. sanctions and, according to the administration, hasn’t implemented minimum global safeguards against money laundering and terrorism financing.”
While oil struggles on fears of the supply side, the demand side should get better. Oh, sure we keep hearing about a slowing economy, but you cannot underestimate the impact of Fed rate cuts. The Fed has the oil market’s back so a break below $50 would be very unlikely unless we get hit with some major economic shock. The world is back in easy money mode. Easy money mode ultimately is bullish for demand.
The U.S. Department of Agriculture (USDA) will also have an impact on markets today. As of June 2, only 46% of the U.S. corn crop had emerged, far below the five-year average of 84%. So far because of the wet weather only 83% of corn is planted and 60% of the soybeans. AG Web reports that “As traders, farmers and analysts wait for USDA to deliver the June WASDE report on Tuesday, opinions are mixed as to whether they will update planted acres and yield estimates. “With the WASDE, traditionally, the USDA is only really talking about demand, how much and how big is the backdrop in South America? And if it’s big, are they taking away our exports? That’s not the case this time,” Craig Turner, title, told AgDay host Clinton Griffiths. “Sometimes the USDA does step in early, and they know they need to start ratcheting down these kinds of things. I wouldn’t be surprised if the acres are lower. But with the yield it’s real early, and you know, they could publish a 176 bu. per acre corn yield.”
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network