Let The Cuts Begin

Oil’s early opening optimism on a possible resolution of the government shutdown gave into global economic pessimism after China's Markit Manufacturing Purchasing Managers' Index (PMI) for December dipped to 49.7 from 50.2 in November, much weaker than expected. That number showed that the trade war is taking its toll as manufacturing in the U.S. and China seems to be easing. The slowdown fears caused global stock markets to reverse opening gains, putting more pressure on OPEC to stabilize the petroleum markets, where all the major oil producers, Saudi Arabia, Russia and the U.S. saw production hit record highs. So let the cuts begin.

Today is the day the OPEC cuts go into place, and by all measures, we will see high compliance. There are reports that Saudi Arabia has already reduced exports of oil to the U.S. to zero and are on track to over-comply to their agreed upon OPEC cuts. Doubters will see record compliance to cuts.

They will need to as U.S. crude oil output hit an all-time high of more than 11.5 million barrels per day in October, according to the Energy Information Administration (EIA). Reuters reported that U.S. crude production rose 79,000 bpd in October to 11.537 million bpd, the U.S. Energy Information Administration said in a monthly report. The EIA revised its September oil production figure down by 17,000 bpd to 11.458 million bpd.

Russia’s oil production also recently reached a post-Soviet high, averaging 11.16 million barrels a day, up 1.6 percent from 2017. Saudi Arabia’s oil production has been at a record high this month—at between 11.1 million bpd and 11.3 million bpd in November. Saudi Arabia’s oil production has also been at a record high this month at 11.2 million bpd. So, they will cut.

What is amazing is with all that production supplies are not as high as one would think if the demand was really slowing that significantly. Global oil demand growth has not slowed that significantly, despite the warning signs we are getting from the manufacturing sector.

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Moon Kil Woong 3 months ago Contributor's comment

This market is quite interesting. Yes manufacturing is getting a pullback and the semi cycle is ending, however the US economy driver by mainly the service industry is still chugging along. This years winter driving and Christmas season oil usage is all up.

The author has a point that gas prices are still relatively high in the US. Sadly it is partially because of gas taxation. However, Exxon and companies processing oil to gasoline are probably doing well despite the drop in oil. Of course Exxon didn't get much of a rise when oil prices skyrocketed. So stability in this stock is more the key I guess.

The main point is the US is pumping as much oil as it can because small oil companies must cover cash flow and pump at a loss and will soon buckle. I don't expect the projection for massive increases in US oil output from here as some do. The oil price decline will only strengthen the case for reduced oil production growth from here on out. The oil price decline will hurt the US now rather than help it. This is a big change from the 1970s.