Crumbling Cartel

Oil prices tried to hang on and ride along with the Chairman Powell stock market rally but fell off under the weight of an increase in crude oil supply and a crumbling cartel. While it may be obvious to most market watchers that oil producers need to cut oil production to avoid an economic downturn it seems to be lost on some members of the alliance. Reuters is reporting that Saudi Arabia’s energy Minster said they will not cut oil output on its own to stabilize the market because Nigeria and Russia said it is too early to signal whether they would join any production curbs.

Nigeria has a hard time pumping its quota anyway due to frequent pipeline attacks but as reported by the Wall Street Journal their breakeven point for oil is $126 a barrel. The real reason Nigeria is balking is they hope the Saudis, who really need a cut, will allow them to keep producing while they cut back. The Russians are in much better shape. They need only $53 a barrel and they are using the Saudi’s pain, not to mention its problems with the Khashoggi murder, to their political advantage. Yet, despite the drama, the cartel will have to cut and it’s clear that the Russians just want to watch the Saudis squirm a bit. We should have confirmation of some kind of a cut this weekend.

Yet, will it be enough to shift the mood? Oil dipped below $50 WTI in the overnight and is trying to bounce back. Oil latched on to the equities rally following a speech by Federal Reserve Chairman Jerome Powell proclaiming that when it comes to the neutral area for interest rates, we are almost there. The speech sent equity markets to the moon and sent the dollar lower. Yet oil succumbed to a late day sharp selloff on concerns about OPEC and a big crude oil supply build. Traders fear that OPEC was losing control of the market and $50 a barrel was holding by a thread. 

Crude supply did rise by 3.5 million barrels but was helped by a 2-million-barrel release from the Strategic Petroleum Reserve. Total crude build puts current inventories within 3 million barrels of year-ago levels. Rising demand was through the roof as refiners ran much more than expected. Export demand for U.S. oil products surged to 1.07 million bpd to an all-time high of 6.272 million bpd. Crude exports hit 2.44 million barrels a day.  Ready to use gasoline stocks increased 1.1MB this week. Distillates increased 2.9MB after dropping 1.3MB last week. Bottom line demand is very strong, and supplies will tighten. Look to put on long-term bullish strategies now.