Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 32 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.
EIA DATA: Last week crude oil inventories fell 5.5Mb versus the forecast of a decline of 1.7Mb as refinery utilization rose from 90.6% to 93.3% last week. As a result of this increased refinery activity Motor Gasoline inventories rose by 2.0Mb and Jet Fuel by 1.1Mb. US production recovered to the peak of 12.9Mb/d up 100Kb/d on the week. Demand fell by 485Kb/d to 21.3Mb/d last week with gasoline consumption falling 109Kb/d to 9.3Mb/d due to the holidays. As a result, crude oil is holding flat on the day at US$61.70/b. Overall it is a mixed report.
Oil prices are holding up as it appears that China and the US will sign a phase one trade deal even though it is not much of a deal in terms of dollar amounts or protection for US technology. It does show a ramp up in farm imports especially of pork products which are in short supply in China with prices rocketing higher as they were hit by swine flu that decimated their herds. The Chinese diet is high in consumption of pork products. The deal provides face for both of the leaders and for President Trump fodder to help him in the critical and closely fought farm states as the 2020 Presidential election gets closer.
The cutback by OPEC of 500Kb/d for Q1/20 with Saudi Arabia taking off 400Kb/d is helping to keep prices up. The success of ARAMCO’s IPO is now fully in the market and the stock remains above issue price. One news piece today from Russia has been helpful in that Russian oil companies were producing 240Kb/d less in December (report from the Energy Minister Novak) but they seem to have now removed condensate volumes from their official numbers and this part of their production rose. Net, this is not a real positive and Russian production overall is above its agreed to level with OPEC. The next OPEC Monthly Report comes out on January 20th and will be watched carefully to see if Iraq, Kuwait, Venezuela (surprise here as Russia and China help them get diluent) and Libya continue to raise production and fail to comply with their OPEC quota.
CONCLUSION: Near term we see a trading range for crude between US$54-66/b with an expectation that crude will head lower once we get past the New Year. We expect some backing and filling in crude oil and stock prices during Q1/20 and expect an attractive buying opportunity after WTI crude prices back off below US$60/b. The new bull market in commodities is underway. We may see a general market correction in Q1/20 as investors move out of the FAANG momentum stocks into commodity stocks. The transition phase is now on.