The Saudis Are All In When It Comes To Cutting Production

Despite the recent correction in crude oil, the Saudis say they are all in when it comes to cutting production. Despite the recent stock-market inspired shake out and the surge in shale oil output, the truth is that the global oil market is going through its most significant tightening cycle in over a decade. The Saudis are not going to let a little stock market correction and shale surge stop them from their goal of tightening the global oil marketplace. Saudi Energy Minister Khalid al-Falih sent the message that he would rather leave the market tight than end the deal on cutting output too early. In other words, OPEC wants to get us into a daily supply deficit and cause a spike in prices.

Oil prices rallied even as U.S. crude production hit a record 10.27 million barrels per day, mainly because it did not cause a major increase in overall supply. The Energy Information Administration reported that U.S. supply increased by only 1.8 million barrels, less than analysts had expected. What was even more bullish was the shocking 3.642 million barrels drop in the Cushing Oklahoma delivery point, draining that hub at a record pace.

 So, as I wrote before, cooler heads will prevail. The correction in oil was and is a buying opportunity. You don’t want to fight the Fed and you do not want to fight OPEC. Despite the market turmoil, the outlook for oil demand is as strong as ever. We may see a little seasonal weakness, but the big picture is that oil demand growth is the strongest we have seen. We predict that all major reporting agencies will again have to raise their oil demand forecasts to get in sync with what is happening in the global economy. Like stocks, the correction in oil was overdue, healthy and does not change the bullish fundamental outlook for this market.

The EIA did show that maintenance season is here, but we still ran an impressive 16.2 million barrels of crude per day. That was 635,000 barrels per day less than the previous week’s average. Refineries operated at 89.8% of their operable capacity last week. Gasoline production decreased last week, averaging 9.6 million barrels per day. Distillate fuel production decreased last week, averaging over 4.8 million barrels per day. U.S. crude oil imports averaged 7.9 million barrels per day last week.

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Abe Jouejati 3 years ago Contributor's comment

True that the demand for oil has not yet shifted, however the price correction was inevitable. The automobile and logistics industry which rely heavily on oil production are operating at full speed and increasing in size.

For the past four years $WTI has been mostly below $60/barrel. Now that it has surpassed the $60 mark, we can anticipate higher prices, in accordance with the high demand.

Alexa Graham 3 years ago Member's comment

Makes sense.