Price War! Oil drops 24% on Saudi Reversal & Continued Economic Carnage from Coronavirus

Posted by Kelly Burke on Mar 9, 2020 4:13:04 PM

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Oil markets were tumbling well before the open today, and unfortunately we didn't see that turn around at all through the course of the official trading day.

At the open, we were down -.2076 on ULSD, and -.2362 on gas and it only went downhill from there.

At the close, Crude settled at an incredible $31.13/bbl (down 24%!!), ULSD dropped -.2223 to $1.1629 & RBOB dropped .2521 to $1.1369.

Stock markets took a pounding today as well, dropping precipitously enough for trading to be temporarily halted when the Dow Jones Industrial Average dropped over 2,000 points after the open this morning. (Both the S&P and DJIA are down over 6% as of writing)

So what's going on?

In response to Russian refusal on the proposed OPEC production cuts, Saudi Arabia has completely changed course on cuts and announced they will not only be pumping at capacity starting April 1 (upon the expiration of the current cuts) but they are also additionally discounting by a reported 4-8 $ per barrel, with preferential pricing going to the US & Europe.

The move is meant to undercut other producers across the board  - somewhat reminiscent of the strategy employed to attempt to push out U.S. Shale production back in 2014-2016(ish) and retain market share at the expense of other producer nations (refresher/throwback on that here: 2015 - backstory on that strategy impact on Russia back then here as well: 2016 ) 

The thing is though, the math has changed substantially on both the Russian & US fronts in terms of capital on hand to withstand the drop in the case of Russia, and production cost and infrastructure in the case of the United States, so it will be interesting to see who blinks first. It's unlikely to be Russia, they announced they can withstand $25 oil for 2 years. (whether that is true or not remains to be seen)  

The second half of the equation today is that the ongoing Coronavirus outbreak is seriously dampening both global economic expectations, and oil demand. In particular, as US cases rise, concerns rise as well on economic impacts. Fear of the virus becoming a full on global pandemic are also in play now as Italy made the move to quarantine an entire region this weekend in an attempt to contain the spread. 

Basically, falling oil prices and falling demand paired with virus induced low global economic growth is igniting fears of a recession. In particular, the US, who has recently become a major producer and net exporter, could feel major impacts that we are not used to. 

Again, it's anyone's guess if we are seeing the bottom or not yet or how long it will take for the factors involved to reverse course. In the mean time, stay tuned (and wash your hands!)

 

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Topics: OPEC, russia, stock market, saudi arabia, Coronavirus

Oil Tanks 10% on No OPEC Deal & Continued Pandemic Fears

Posted by Kelly Burke on Mar 6, 2020 5:00:46 PM

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Wild day on the markets today! Oil plummeted on news that the production cuts proposed at the OPEC+ meeting in Vienna were rejected by the "plus" contingent of the OPEC+ coalition - namely, Russia.

Current cuts will remain in place through March, but technically there is no agreement for continued production cuts past the 31st, which means its anyone's guess how production will be ramped up among OPEC+ nations (assuming another deal is not hammered out). Proposed cuts were contingent on Russian agreement and well... they said no. 

Upon the news, the market dropped 7% essentially immediately, and continued on down throughout the day, closing down 10%  - with WTI settling at $41.28/bbl (lowest it has been since August 2016!). ULSD dropped .1033 to settle at 1.3852, and RBOB dropped a whopping .1328 to close out at 1.3890.

The timing on this could not be worse, as global economic demand growth has been taking a pounding from the Coronavirus' impact on major economic players, specifically China. There was some indication in late February that the virus was being contained in terms of slowing new cases, but that appears to have been wildly inaccurate - infections have now surpassed 100K, and spread to over 93 countries, according to the CDC. 

The stock market was hit just about as hard as the oil markets today in the ongoing panic, despite positive jobs numbers and the signing of an 8.3 billion dollar epidemic relief package in the US aimed at ramping up efforts to contain and combat the virus, as well as develop a viable vaccine as soon as possible. The bill also includes SBA loan options for industries hit particularly hard by the outbreak (like airlines), which was in part meant to combat some of the economic fallout and panic - but today's stock market numbers would indicate it was not successful in that endeavor. 

All of this to say - it's anyone's guess if we have hit the bottom on pricing yet, and it's likely to be a day-by-day analysis until the pandemic fears subside... at which point global supply (and potential supply cuts) will again become the main driver.

Stay tuned! 

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Topics: OPEC, WTI Crude, stock market, Coronavirus

Markets Up on OPEC+ Hope and Coronavirus Slowdown

Posted by Kelly Burke on Feb 12, 2020 3:18:21 PM

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WTI Crude traded & settled below $50/bbl earlier this week, as prices continued to slide across commodities. Today, however, we saw the trend reversing, with the market up this morning by almost 3%. (Early on, we were up over the 3% mark but gains dropped off slightly after the EIA inventory reports were released this morning.) 

EIA Inventories showed builds on Crude of 7.5mmb, well above analyst expectations. Gasoline drew down 100K bbl, and distillate stocks dropped 2mmb, as well. Distillate numbers were essentially in line with expectations. Crude pared about .5% on the builds, and gasoline moderated but stayed up, as analysts were predicting builds of ~700K barrels versus the actual drop of 100K barrels reported. 

In broader news, most of today's increases are being pegged on confidence that the OPEC+ production cuts supposedly forthcoming will both be in effect quickly, and will see full member adherence to new lower limits.

Also, China is reporting the lowest number of new Coronavirus cases since January, which is continuing to restore confidence in their economy and calming fears regarding a longer term global slow down on oil demand growth.

At the close, Crude settled back up over $50 again at $51.17/bbl (Tuesday's close was $49.94), ULSD closed up .0490 to $1.6757 and RBOB closed up .0668 to $1.5810.

Stay tuned!

 

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Topics: OPEC, WTI Crude, EIA Inventories, china, Coronavirus

Crude drops 15% in January

Posted by Kelly Burke on Jan 31, 2020 3:32:02 PM

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After what seems like 76 days, January is finally over. 

As it goes into the books, January 2020 will go on record as having the largest drop in Crude prices since January 1991 - with a drop of 15% (around 12% on Brent). That's a lot on it's own, but it's especially surprising if you remember that the beginning of the month saw huge spikes on the US-Iran Strikes.

The largest driving factor dropping prices now is growing concern about the potential global economic impacts of the Coronavirus spreading from the Wuhan province in China. There have been several cases now outside of the original geographic area, including the first confirmed human to human transmission in the US.

Late Thursday the World Health Organization (WHO) declared the virus a global health emergency. Rumors abound that the State Media in China is vastly under reporting the numbers when it comes to official infection rates and the death toll. Whether that is true or not, it has thoroughly spooked investors and traders, as global markets and the NYMEX tumbled this week.

Wednesday's EIA report showed domestic Crude builds shot way past expectations, clocking in up 3.5mmb for the week ending January 24. (Gasoline also hit a high of 261.1mmb). Obviously builds do not bolster prices, but Wednesday was relatively calm as compared to both Monday & Thursday. Thursday alone saw a 2.2% decline in Crude prices (to $52.14), and a drop of over 6 cents on ULSD at the close. 

Markets kept the downward trend going today as well, with March contract month numbers closing down .0136 on ULSD & off 14 points on RBOB, with Crude settling out at $51.56/bbl.

Reportedly, OPEC is already in discussion to move their March meeting up to promote cuts and stem losses. It's worth noting that the Libyan outage had essentially zero effect on prices this week, where it otherwise (presumably) would have - so the OPEC changes will likely need to be substantial to move the needle, unless the Coronavirus dies down relatively quickly. 

So while we don't know how long prices will be depressed, or when they might reverse, what we do know is that times like this it makes sense to reevaluate the strategies you use to hedge against the market with contracts or variable options, so you can get ahead of the next spike.  

See you in February! 

 

 

 

 

 

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Topics: OPEC, WTI Crude, EIA Inventories, Coronavirus

Inventories & Rumored OPEC+ Cuts Boost Oil Prices

Posted by Kelly Burke on Dec 4, 2019 3:50:58 PM

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Markets shot up today after relative calm earlier in the week, on EIA inventory reporting this morning that showed a 4.9mmb drop in Crude, once again far surpassing analyst predictions.

This week's report marks the first time in 6 weeks that US Crude inventories have showed declines.

At the close, WTI settled at $58.43, ULSD was up .0430 to $1.9229, and RBOB was up .0413 to $1.6042. 

In terms of larger ongoing issues affecting markets, the OPEC meeting is still looming (this Thursday & Friday). Analysts expect that the OPEC+ agreement will both be extended and strengthened as a result of the upcoming meeting, and they expect deeper cuts going forward to be the main outcome of the meeting (rumor is cuts will be an additional 400K bpd).

However, there has been some drama recently with Saudi Arabia and other member nations over adherence to production caps.

Basically, Saudi Arabia has kept production well below their agreed upon level in order to offset the overproduction by non compliant producers (Iraq being chief offender - they over pumped by around a quarter million barrels per day). As a result of that, Saudi Arabia is essentially subsidizing and taking the financial hit for other countries over production in order to keep global pricing levels stable. 

Understandably, they are a little tired of doing so and last week threatened to unilaterally boost their own production and send the whole pricing house of cards tumbling if other nations don't step up their compliance rates. Its likely an empty threat - even though they're taking a hit covering for the other nations, they also stand to lose the most (by a LONG shot) if prices were to crash now. The threat is meant to keep other producers in line, but who knows what will happen if they don't. We will have to see how the meetings go at the end of this week. 

Stay Tuned! 

 

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Topics: OPEC, EIA Inventories

Mixed Market Week on Same Old Concerns

Posted by Kelly Burke on Nov 22, 2019 3:27:27 PM

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Happy Friday!

We are ending out a mixed week on the NYMEX today, to put it mildly. Monday & Tuesday were both substantial down days with the market shedding over 4 cents (.0433 and .0473, respectively) on ULSD both days, and landing Crude at $55.21 at Tuesday's close. 

Wednesday & Thursday however, saw the NYMEX jump up substantially.

Wednesday's inventory numbers fell short of expected builds and we saw intraday highs over 5 on refined products, with the close reflecting +.0347 on ULSD ($1.8921) and +.0526 on RBOB ($1.6563) and Crude closed at $57.11. 

Thursday gains were around 2% with ULSD closing up +.0526 to $1.9447, RBOB +.0481 to $1.7044 and Crude up to $58.58, a two month high. 

Today we saw the market shed some of the week's earlier gains, with ULSD down -.0153 to $1.9294, RBOB off -.0301 to $1.6743 and Crude closed out at $57.77, about back where it was Wednesday mid-morning. 

So what's going on? Good question. It seems a lot of the back-and-forth action this week (and for a few weeks prior) has primarily been the result of ongoing speculation and reaction on three repeating themes 1) China-US Trade War 2) OPEC Cut questions 3) Global economic concerns.

Essentially we have been bouncing up or down based on reaction to inventory reporting, economic reports, rumors of progress then retreat on ongoing China-US discussions, tariff delay questions, and uneasiness about what OPEC may or may not announce regarding cuts at their December 5th meeting. 

Hopefully there is some solid direction on any of these questions over the next few weeks, or it's anyone's guess when the see-saw action will subside. Until then, it's Deja Vu all over again, as they say. 

Stay tuned!

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Topics: OPEC, NYMEX, EIA Inventories, china, tariff

Supply vs. Demand Concerns Temper Early Gains

Posted by Kelly Burke on Nov 14, 2019 3:27:29 PM

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The markets were initially up somewhat today on EIA inventory reporting and projected slowdowns in US Shale production through 2020.

However, ongoing positive hopes regarding a trade deal between China and the US, as well as some unexpectedly positive demand numbers from China allayed some concerns on the demand side of the equation and prevented supply related spiking on the NYMEX today, and we ended up closing down on Crude & RBOB, and up slightly on ULSD. 

Official numbers at the close: Crude $56.77 (from $57.12), ULSD $1.9179 (+.0054) and RBOB $1.6158 (-.0207)

On the OPEC front, no "major changes" are anticipated on current supply curbing measures and member adherence. There is some question though if going forward there will be further cuts to prop prices, which seems important both for Aramco valuation and to compensate for continually dwindling demand. On the other hand, the ongoing concerns for the cartel regarding the portion of demand loss that has been taken by non-OPEC producers, including the US, makes further supply cuts anything but a sure thing.

As we've discussed, OPEC nations, particularly the Saudi's have the lowest oil production costs globally, so while they can withstand "cheap" oil, producers of Shale who are looking at both higher production costs and high overhead and financing debt on newer exploration projects cannot. Thus far, obviously, the multi-year campaign to push higher cost producers out has not worked - and some analysts think that should OPEC decide to pursue further cuts to prop pricing, (rather than continuing to ride it out), it could signal an acceptance of this fact and potentially signal a major shift in their approach going forward.  

The next meeting is scheduled for December 5-6. The way the news has been going, it's probably a good assumption that we will see enough volatility from other issues that it will sneak up on us again. 

Either way, stay tuned! 

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Topics: OPEC, EIA Inventories, shale, US Crude Production

EIA Data drops prices, but OPEC cuts loom ahead of Aramco IPO

Posted by Kelly Burke on Nov 6, 2019 3:27:17 PM

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The NYMEX was down across the board today, with Crude settling at $56.35 (from $57.23), ULSD dropping .0288 to settle at $1.9278, and Gas shedding .0484 to close out at $1.6262.

We've been up and down on the markets recently with the news doing a tug-of-war around trade tensions, global supply fundamentals, and demand/economic outlook concerns.

Today's drop, however, we can attribute to a pretty straightforward factor - huge builds in supply on this morning's EIA report. 

This week's EIA data showed an increase of a whopping 7.9 mmb in Crude supplies, almost triple the number (2.7mmb) analysts had predicted. This is the second week in a row that analysts pegged a build of around 2.5/2.7mmb and the actuals dwarfed the estimates, which explains much of today's quick drop (no one had it "priced in"). 

Gasoline & Distillate inventories both showed draws, but came in relatively close to analyst predictions, with actuals showing 2.8mmb on gasoline (2.4mmb predicted) and 600,000bbl on distillates (versus 1mmb predicted). Gas & Diesel have had unseasonably high demand as of late so draw downs are actually a positive sign in that regard.  

So supply is up more than anticipated, and there are still concerns regarding global demand & economic growth... but before deciding that means prices will stay depressed, its important to note that OPEC is again discussing further supply cuts across the board, despite the ever present concern regarding US Shale production.

Word on the street is that Saudi Arabia has been pressuring producers in their region to agree on further cuts in an effort to boost market valuation of the Aramco IPO. (High valuation on the IPO may make risking a resurgence in shale production in the US worth it, when it otherwise would not be).

It's unclear if and when the cuts could take effect, but its definitely something that could impact near term pricing and is worth keeping an eye on. 

Stay tuned! 

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Topics: OPEC, EIA Inventories

Talk of Easing Iran Sanctions Trumps Crude Draws

Posted by Kelly Burke on Sep 11, 2019 3:36:58 PM

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After starting the morning up on the EIA inventory reports of large crude draws (-6.9 mmb), the NYMEX dropped later through today's trading, as more information about the firing of US National Security Advisor John Bolton came to light, and as global demand growth estimates were revised downward yet again. 

The reason an Advisor firing is at all relevant to the oil markets is: Iran.

There was speculation immediately that Bolton's firing was a good sign for US-Iranian relations, and as details emerge it seems that speculation was not only accurate, but an undersell.

Bloomberg is reporting that the Administration discussed easing sanctions in order to broker meetings with Iranian President Rhouhani and kickstart negotiations. Evidently the support voiced for doing so led to a blowout of sorts that prompted the firing. 

Prices dropped almost instantaneously on the news that sanctions could potentially be eased on Iran. 

Additionally, today OPEC's estimates for global growth demand were revised downward (but worth noting is that the revision puts their estimates in line with those of other analysts and economists already existent predictions). The EIA numbers were revised slightly down yesterday as well (down 100,000 bpd from the August prediction to 900,000 bpd).

Overall it appears that for at least today's session, the current market of OPEC cuts and US domestic crude draws did not outweigh longer term concerns about a potential future supply glut in the face of low growth demand. 

At the close, Crude settled at $55.75/bbl, ULSD shed .0280 to close at $1.9032, and RBOB dropped .0209 to close at $1.5699

We'll have to see what happens tomorrow. 

 

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Topics: Iran Sanctions, OPEC, EIA Inventories

Today's Market = John Bolton Firing vs OPEC Cuts

Posted by Kelly Burke on Sep 10, 2019 3:22:00 PM

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This past Friday, ahead of the scheduled OPEC meeting this week, Saudi Arabia abruptly announced a new Energy Minister, Prince Adbulaziz. The move sparked momentary concern that this was a signal the Saudi's would be reversing course on the OPEC+ production cut agreement, but it appears they are actually doubling down.

The kingdom announced they would be adhering to and encouraging the production cuts going forward, and Russian officials announced that they fully anticipated continuing the current trajectory with the new leadership. 

This consensus initially let prices continue their several day climb, with WTI hitting a 6 week high momentarily ... BUT!

But this afternoon, the Trump Administration announced the firing of US National Security Advisor John Bolton.

Bolton was extremely vocal regarding his hardline stance against Iran, and his "resignation" may be a positive signal for future progress on peace talks with Iran, and in the near term, may be a good move to de-escalate the current situation, a lot of which has impacted the oil industry via threats to tankers & the threat to block the Strait of Hormuz. 

Prices have backed off intraday highs following the Bolton announcement. Essentially any hint of resolution with Iran, while positive, also renews concerns about Iranian supply flooding the market, and that is pushing down on pricing (despite the prematurity of any concern). 

Time will tell how the interplay between production cuts and lingering supply concerns levels out, particularly depending on inventory reporting (which we should see tomorrow) and domestic production.

For today, at the close, we ended essentially flat. ULSD +.0035 to $1.9312, RBOB +.0062 to $1.5908

Stay Tuned! 

 

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Topics: Iran, OPEC, russia, WTI Crude

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