The petroleum complex traded mixed today with underlying support developing in response to reports that Kuwait is committed to implementing the production accord to reduce output. The Kuwaiti Oil Minister suggested that global oil demand is at acceptable levels and should improve. He also added that fears of an economic downturn were exaggerated and that demand was acceptable and should improve in the coming months. The comments helped provide some underlying support to values but with the Saudi’s announcing that they would be pursuing an IPO in the coming year, concerns arose that the OPEC+ agreement might come under closer scrutiny.
Despite the statements, we remain skeptical that the market will re-establish a bullish trend. Comments suggesting that the current agreement is working appear to be a distortion given the markets weakness and inability to respond to disruptions in the Straits of Hormuz. Questions over the global economy continue to surface and expectations suggest the potential for the trade dispute to impact China adversely. With global oil demand growth growing at the slowest pace since 2008, we suspect that participants in the current agreement will be hard pressed to relinquish any further market share. How committed the Russians are to adhering to the OPEC agreement is also a consideration.
The key question for the market looks to be how committed Saudi Arabia and other members of OPEC+ are to cutting production further if needed. With US production levels expected to expand and reports suggesting US barrels are displacing some origins such as Nigeria and Saudi Arabia, it appears that as pipeline capacity expands in the Permian Basin even greater pressure will emerge. In addition, Russia does not appear to be providing unconditional support to the agreement but instead is suggesting that they had already incorporated weak demand into current policy.
The growing recognition that the current agreement might not be enough and that demand and production trends are suggesting that OPEC is fighting an uphill battle should limit the upside. Resistance should begin to emerge near the 56.00 level basis September provided no concrete move is made to cut production further, with potential for values to move back down and reach into the 47.00-48.00 area, particularly if signs emerge suggesting that the global economy is slowing and pressure remains on equity values.
The natural gas market continues to struggle despite forecasts for above normal temperatures in the 10-14 day outlook. The poor performance might reflect ongoing weakness in financial markets, which could eventually impact industrial usage. Although LNG shipments are expected to increase, it appears some concern is building over the weak LNG prices evident overseas and potential arbitration over longer term contract prices. Expectations for the EIA report this week point to an injection of 55 bcf compared to a five year average of 49. Overall the market is looking for positive inputs but looks poised to test the 2.00 level basis September, where support might emerge on ideas that bearish considerations have been priced in, and on concerns over potential production shut-ins.
Charts Courtesy of DTN Prophet X
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