The oil price comeback is in jeopardy after it appeared that Russia was waffling on extending oil production cuts past June or maybe they agreed to increase cuts with Saudi Arabia. It was a clear case of mixed signals from Russia and OPEC that eroded confidence in the recent market rally. A very bearish American Petroleum Institute (API) did not help the mood as it appears the oil demand snapback is leveling out.

Overall crude supply surged by 8.730 million barrels. It looks like one of the Saudi Tankers offloaded. Argus Media reported that eleven of the 16 very large crude carriers (VLCCs) that have arrived at the US Gulf coast with Saudi crude this month had completed their discharges. The API also showed plenty of gasoline ahead of the Memorial Day Holiday increasing by 1.12 million barrels. Yet the shocking increase came in distillate inventory that saw a whopping 6.907 million barrel increase, among one of the largest weekly in history.

Yet before the report, oil was whipsawed on stories about Russian oil output. Reports were swirling that Russia was pushing for raising output slowly once the current OPEC Plus deal ends in June. That was a surprise because it seemed as if Russia and OPEC were set to extend cuts until the end of the year. Yet the temptation to raise output by Russia and other countries is rising as prices are more attractive, and there are signs that the market may balance in a few months, much faster than most people expected.

Yet later in the day reports came out that Saudi Arabia and Russia were contemplating an even production cut. In a call between Russian President Vladimir Putin and Saudi Arabia's Crown Prince Mohammed bin Salman, they promised so-called "close coordination" on oil output cuts. Russia put out a statement that "It was agreed upon further close cooperation on this topic via the energy ministries." As I told Reuters, "It sounds great on paper, but the market is holding back excitement until we get a few more details about whether there will be cuts, how many barrels will be cut, and the length of the cuts.”

The crude oil market also has concerns about the fall-out from the fact that the Chinese legislature passed a  new national security law for Hong Kong. The law is squelching Hong Kong's right to dissent and is cracking down on the freedoms the country has had. The AP said the National People's Congress backed the bill as it wrapped up an annual session that was held under intensive anti-coronavirus controls. The vote was 2,878 to 1, in line with the high-profile but mostly ceremonial body's custom of near-unanimous approval of legal changes decided by the ruling Communist Party.

US Secretary of State Mike Pompeo tweeted yesterday that, "Today, I reported to Congress that Hong Kong is no longer autonomous from China, given facts on the ground. The United States stands with the people of Hong Kong." This could jeopardize Hong Kong's special trade status and will now be treated the same as mainland China. There also could be sanctions coming from the Trump Administration on China and some leaders, and the fear is it could further delay the US-China trade deal and ultimately weaken Chinese oil demand. 

The New York Times is reporting that the US plans to cancel thousands of visas of Chinese graduate students and researchers in the US who have direct ties to universities affiliated with the People's Liberation Army, citing US officials familiar with discussions.

Andrew Weissman of EBW analytics reports that the June natural gas contract rolled off the board at $1.722/MMBtu, down 22.0¢ since assuming the front-month role. Even greater losses for the July-October contracts over the past month, however, may foreshadow continued weakness. Near-term, repeated 100+ Bcf injections and healthy storage surpluses could yield further downward pressure, as traders and producers question whether even record production declines and surging power burns are sufficient to tighten the gas market. By the 30-45 day window, there may be (i) further deterioration in LNG feed-gas demand and (ii) rising gas supply, as curtailed oil wells and EQT restart production. Likely continued economic weakness and an active hurricane season may present further obstacles for bulls. Declines, however, are likely to be slower and shallower than the past month.