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Oil: What’s The Story?

Published 10/22/2018, 08:34 AM
Updated 07/09/2023, 06:31 AM

Saudi Arabia’s Crown Prince is shocked that anyone would believe that he would have anything to do with the death of journalist Jamal Khashoggi, who just happened to leave. I mean, was attacked by rouge elements, I mean got into a fist fight at the Saudi consulate in Istanbul. The Saudi Crown prince of course knows nothing about it other than for sure it was not his fault. In the meantime, the U.S. is stressing the importance of the U.S.-Saudi relationship as the world and the world oil market is heading into winter with one of the tightest supply situations in years and ahead of U.S. sanctions on Iran. The Global oil market can’t afford to lose more oil as we are seeing spare oil capacity fall to the lowest level in modern history.

In fact, according to Reuters, OPEC is already having a hard time keeping oil production where it is. Internal documents from OPEC show that they may be close to being already tapped out. Reuters says that OPEC is struggling to add barrels to the market after agreeing in June to increase output, as an increase in Saudi Arabia was offset by declines in Iran, Venezuela and Angola.

This comes as Saudi Arabia’s Minister of Energy Khalid Al-Falih claims that Saudi Arabia can pump more oil, but he is not sure if anyone can. He said in an interview with Tass that “Saudi Arabia now in October produces oil at the level of 10.7 Mln bpd. I can say that we can go up, if necessary, to 12 Mln bpd. This I can assure. But if 3 Mln bpd disappears, we cannot cover this volume. So, we must use oil reserves. But it is very important for the world to support Saudi Arabia, because it is the only country that invest heavily in spare capacities.”

“For now, we in Saudi Arabia have 1.3 Mln bpd of spare capacity, UAE has assured me they have over 200,000 bpd remaining. But we do not know what is going to happen in other countries. We know Kazakhstan plans to increase production with Kashagan and Tengizoilfields., Brazil is expecting to increase production. And U.S. shale could bring additional volume of oil. So, it may happen that we may not need to use spare capacities. But if you have other countries to decline in addition to the full application of Iran sanctions, then we will be pulling all spare capacities.”

U.S. drillers are trying and have added oil rigs for a second week in a row this week, raising the rig count to the highest level since March 2015. Drillers added four oil rigs in the week to Oct. 19, bringing the total count to 873, said Baker Hughes Inc. Yet, the shale folks are still having trouble making money. A report from the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute warned about “alarming volumes of red ink” within the shale industry. “Even after two and a half years of rising oil prices and growing expectations for improved financial results, a review of 33 publicly traded oil and gas fracking companies shows the companies posting negative free cash flows through June.

Distillate supplies are still tight and the Trump Administration, according to Reuters, wants pollution limits on ship fuels that a United Nations maritime agency will implement in 2020, to be phased in to protect consumers from any price spikes in heating and trucking fuels, a White House spokesman said on Friday. Under the International Maritime Organization rule, ships cannot use fuels with more than 0.5 percent of sulfur, compared with 3.5 percent now, unless equipped with so-called scrubbers limiting the emissions. The rule will be enforced through fines levied by IMO member states. The IMO said last month it would not delay implementation after some shipping groups as well as the Bahamas, Panama, Liberia and the Marshall Islands supported a phased-in implementation of the rules. If refiners are unprepared for the changes, some analysts have said, prices for related fuels, such as diesel and heating oil, could rise. A spike in fuel prices ahead of the 2020 elections would be a political risk for Trump, Reuters says.

General risk on is helping oil but fears of short-term supply increases is clouding the bigger picture. Despite the market’s weak mood, the year-end rally is just ahead. Make sure you are hedged. The time is running out before the Iranian sanctions kick in .

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