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Matt Smith

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Confusion On Saudi Proposed Production Cut See Oil Prices Spike

Eighty-nine years after Jean Goldkette and his Orchestra recorded ‘I’m Looking Over a Four-Leaf Clover’, and the crude complex is once again crossing its fingers and hoping for some good fortune to lift prices.

Today the market is putting its faith in a coordinated cut to oil production from key producers including OPEC and Russia. While a cut of 5 percent is being bantered around, the difference between its suggestion and the actual reality of it being agreed to and …wait for it…adhered to, seems otherworldly at this juncture.

Nonetheless, prices are rallying strongly thus far after the Russian Energy Minister Alexander Novak said that Saudi Arabia is proposing a 5 percent cut from each country. All the while, I sit here and look at our ClipperData, showing January loadings in the Arab Gulf up over 7 percent versus last January as Iran and Saudi boost their loadings… (n.b., Arab Gulf = Iran, Iraq, Kuwait, Oman, Qatar, Saudi, UAE, Yemen): Related: 9 Billion Barrels Of Crude At Risk In Massive Nigerian Oil Shakeup

We have had a plethora of tidbits on the economic data front; German imports fell 1.2 percent in December, in line with expectations, while Spanish retail sales came in worse than expected (+2.2 percent YoY) while its unemployment rate came in slightly better (yet still at 20.9 percent). UK economic growth was in line with consensus for Q4, up 0.5 percent QoQ, +1.9 percent YoY. Eurozone consumer confidence was in line with consensus, while both industrial and services sentiment were below par. Brazil yielded a much-needed improving economic indicator, with its unemployment rate dropping to 6.9 percent (from a forecasted 7.4 percent). Related: Rumors of OPEC-Russia Coordination Send Oil Prices Surging

As for the U.S., durable goods data was just released, and was pretty darn shoddy across the board – with downward revisions to last month’s number to boot. The headline number dropped by 5.1 percent, the most since August 2014, while the core number fell by 1.2 percent. Weekly jobless claims provided a minor reason to be cheerful, coming in better than expected at 278k, although it too saw a downward revision to last week’s release.

As gasoline prices continue to remain subdued in the U.S. (hark, $1.82/gal in the national average), and as fuel subsidies are cut by governments in the Middle East to reduce spending, Houston residents find themselves paying less for their gasoline than their counterparts in Abu Dhabi, Muscat or Dubai:

There is an interesting article on Bloomberg today discussing how large oil companies are encouraging ‘slow steaming’ – essentially crude tankers going slower – given the logistical issues that unrelenting oversupply is creating. We highlighted slow steaming in our ClipperData last October as the global glut of crude started to cause tanker traffic jams around the globe. As refinery maintenance kicks in again, excess crude will continue to slosh around in the global market, and logistical issues will increase. Related: China Invests $4.6 Billion In Killing Coal, But Is It Enough?

Finally, while on the topic of high inventories, yesterday’s weekly inventory report showed U.S. crude stocks reached 494.9 million barrels – the highest level in over 80 years. As the five-year range so starkly illustrates, crude inventories are set to build over the coming few months. On this basis, the EIA needs to adjust the axis on the Y-axis to account for impending higher levels:

By Matt Smith

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Leave a comment
  • Len B on January 28 2016 said:
    You notice how the so called experts always use the ABSOLUTE oil inventory data vs Days of Supply which paints an entirely different picture...see up coming article on this later today
  • The Realist on January 28 2016 said:
    Everyone, we have to face reality.
    The US loves these low prices and like to play their own game to drive prices lower and their dollar higher.

    Maybe the rest of the world is wising up.

    Maybe cut-backs to get oil back to the $50 dollar level will improve all of our situations, except of course for the US and maybe the Canadian Oil Sands. They still won't be highly profitable at that range.

    What the US better not hope for is that they decide to cut production by say 10 million barrels a day collectively. If that happened, oil would skyrocket and the US dollar would tank.

    Then we would find out how much of the US reserves are truly oil and how much is condensate.

    and in 3-4 months US reserves would be empty.

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