Energy Brief September 9

by Archer Financial Services | Sep 09, 2019
by Steve Platt and Mike McElroy

Price Overview

Prices staged a strong rally today, moving back through resistance near 57.00 basis October. The announcement that Prince Abdulaziz bin Salman would replace Khalid-al-Falih as the Saudi Oil Minister seemed to solidify Saudi government support for the current production pact among OPEC+ members.  The new Oil Minister, who has been a long time member of the Saudi Oil delegation to OPEC and the brother of MBS, indicated upon his appointment that the current agreement to cut production by 1.2 million barrels would not change and has his full support to balance the market. Additional support was provided by reports that Chinese imports of crude had increased during August by 3 percent from the prior month, and were as much as 10 percent above year ago levels.  The favorable increase in Chinese exports helped allay fears that a slowdown in China was affecting demand, although some of the increase was likely moving as products to other Asian destinations.

Crude Oil Market
The appointment of ABS as the first royal to hold the position of Oil Minister might allow more forceful alliances to be forged with other producers given that he appeared to be instrumental in developing the ties with Russia and also formalizing the long term charter of cooperation between OPEC and non-OPEC exporters.  In addition, he appears to have a close relationship with the US regarding the potential sale of nuclear technology.  With the Saudis still committed to the IPO for Aramco, and therefore needing to stabilize and strengthen prices, the potential exists to marshal support within Saudi Arabia for oil policy despite production expansion on the part of non-OPEC members and demand considerations.

How successful the new Oil Minister will be at fighting what appear to be strong headwinds will take time to ascertain.  The first test will be how he navigates the Joint OPEC and non-OPEC monitoring meeting that begins on September 12th and whether he can solidify the relationship with Russia and get Iraq and Nigeria to abide by their quotas.  Longer term the question will arise as to whether he can lay the groundwork to extend the cuurent agreement past March.

The appointment will need to be watched closely over the next few weeks.  Undoubtedly the royal family will do what they can to assure success if at all possible.  However a policy aiming to get prices higher will unleash other forces that could potentially undermine the attempt at stabilizing the market at a price that satisfies their budget needs and ongoing alliances.

Given the uncertainty, it looks like our lower objective below the 50.00 might not be achieved quickly without some indication of how successful the new oil minister will be at forging consensus on future policy.   

Natural Gas

Prices traded through psychological resistance expected near 2.50 and up to levels not seen since May. Strength appeared to be linked to forecasts for above normal temperatures over the next two weeks for the Eastern half of the US and the associated increase in demand, which is projected at 88.2 bcf compared to 80.6 on the five year average.  Supply is expected to total 92.5 bcf compared to 85.3 on the five year average, but was generally ignored.  Instead the potential for LNG flows to increase along with a further pick up in US exports to Mexico continues to aid sentiment and encourage short covering.  Expectations for the EIA report on Thursday suggest an injection of 82 bcf compared to 68 a year ago and 73 bcf for the five year average, which should limit buying interest at these higher levels.

Natural Gas

Charts Courtesy of DTN Prophet X

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