The Energy Report 11/30/18
What’s new Buenos Aires?
Oil Is asking “What’s new Buenos Aires”. The big G20 meeting will basically tell the tale of oil going forward. Forget about the OPEC meeting and the weak economic data out of China and India for the moment and focus on the changing dynamics of the global oil market. Sure, oil is under pressure because of weak Chinese data but the real direction of the market will be set with wheeling and dealing. The Russians are playing hardball with Saudi Arabia, but will agree to a cut if the Saudis take the biggest slice of the pie. Other OPEC members also are looking for the Saudis to do the dirty work in part because it was Saudi Arabia that was most responsible for President Donald Trump tweeting on oil. Bottom line, OPEC needs to announce a big cut or it will be up to President Trump to cut a deal with China to save the price of oil.
Oil weakness is based on concerns that China’s economy is slowing. The official manufacturing purchasing managers index fell to 50.0 in November, lower than forecast. The Wall Street Journal says that the reading adds to a picture of a Chinese economy that is slowing broadly—something that President Trump has said puts the U.S. in a stronger position to negotiate concessions from China. Chinese President Xi Jinping and President Trump are set for a dinner Saturday that could lay the groundwork for a deal.
Yet, while this is raising fears of slowing demand from china, it is not happening now. Bloomberg’s Alaric Nightingale and Stephen Voss report China is using the price drop in oil to buy as much as they can. They write “As oil prices plunge, there are plenty of signs that China is buying the dip — and in potentially large volumes — if shipping and trade data are any guide. Evidence to suggest the world’s biggest source of incremental demand growth for oil has ramped up imports and that its buying remains undimmed”.
The first, and perhaps most authoritative, piece of information comes from the country itself. Inflows last month were the highest for this time of year in customs data starting in 2004. One downside to the data is that they’re backward looking. Another is that China’s imports have tended to trend higher in recent years anyway. So backward-looking data from the Chinese government aren’t your thing? No matter. Just look at the country’s purchases from West Africa. At 1.78 million barrels a day this month, they’re the highest since at least September 2011, and an astonishing 70 percent above November 2017. It’s important to note that the country may be replacing inflows from the U.S. against the backdrop of a trade war. A must read from Blomberg.
U.S. refinery runs surged to 95.6% of capacity. On top of that, lost in the bearishness was the fact that US petroleum exports surged to a record high last week. U.S. Oil demand is surging now. We must see if OPEC can rise to the occasion and save the oil market.
As I wrote for the Fox Business Network website “In the old days, when it came to an OPEC meeting it was always Saudi Arabia that had the swagger. They were for years the world’s top energy producer as well as the global oil swing producer. Their cost of production at one point was among the cheapest on the globe, so they ruled the roost and Presidents and Potentates would try to win favor from the oil production kingdom, but times have changed. Now the Saudis, among the biggest three oil producers, have arguably the highest breakeven points among the three producers to meet their budget needs. The other oil producers in the cartel, who have been push around by Saudi Arabia in the past, now are starting to push back. It appears that most producers are taking advantage of the fact that Saudi Arabia is under pressure because of the murder of Jamal Ahmad Khashoggi, the dissident that many believe was ordered killed by Crown Prince bin Salman. The Market now believes that the Saudis are beholden to Present Trump, who stood by the Crown Prince in what seemed to be an exchange for more Saudi oil production”.
“That has taken away the Saudis power and influence. For the OPEC +1, Russia being the plus one, this has put Russia, not Saudi Arabia as the new de facto leader of the global oil market conspirators. Even though Russia is not an official OPEC member, many in the cartel will look to Russia for leadership this weekend. Instead of embracing an oil production cut, the Russians have left the Saudis twisting in the wind and just recently said that they had accepted the need to cut production together with OPEC, but also made it clear that they would not be cutting that much. So in other words, if there is to be a cut it will Be Saudi Arabia that will have to bear the brunt of it and if they want a cut, they may not have a choice”.
Get ready for a big rally next week if China and Trump lay the groundwork for a deal .Not sure which way to go! Bracket it with puts and call because whatever happens the move should be big.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network