Crude oil sold off on tariff fears but rallied back as Saudi Arabia is signaling that they are just crazy about production cuts and want an extension. It's tariff fears versus rising demand and falling supply for oil and it seems that supply and demand have the edge right now.
Well, if you thought that OPEC production cuts were difficult to put in place, it may be even harder to work out of them. The extremely successful OPEC cuts, along with their co-conspirator Russia, will at some point be scaled back but raising oil production may not be as easy as it seems.
It’s "sunshine on the shoulder" season as U.S. refineries slow runs to 87.8% of capacity, running just 15.9 million barrels, the lowest level of the year as seasonal maintenance flips into high gear. The trade seemed disappointed that the overall 3-million-barrel build in crude oil supply was higher than expected. That is what should you expect when seasonal maintenance is happening.
Ten years ago, the market was fretting, everyone was worried about "peak oil,” and now the focus is on peak demand. Instead of the world on a collision course of fighting over the last drop of oil, now it seems that we have turned the world upside down and now we are seeing predictions that oil demand will peak. The latest peak demand forecast comes from BP, which is predicting that the demand for oil will peak before 2040.
Despite the recent correction in crude oil, the Saudis say they are all in when it comes to cutting production. Despite the recent stock-market inspired shake out and the surge in shale oil output, the truth is that the global oil market is going through its most significant tightening cycle in during a decade. The Saudis are not going to let a little stock market correction and shale surge stop them from their goal of tightening the global oil market place.
Crude oil hedge funds continue to run for the exits and are in part responsible for yesterday’s late-day swoon. Yet, despite market turmoil, the supply versus demand fundamentals for oil continue to be very bullish. Even the International Energy Agency (IEA), that hates to say anything bullish about oil, is acknowledging that despite their prior doubts that OPEC and their Non-OPEC coconspirators have succeeded in removing the global oil glut.
Market mayhem, or maybe just a correction, is shattering nerves and causing crazy volatility. We saw the biggest jump in the VIX Volatility Index or fear index in history. Of course, when you're driven by fear and algos, it’s hard to find stability. Oil is being driven down by fear and not reality as demand so far is exceptional. Unless fear and mayhem take the focus of current reality, crude oil will come back big as long as we see stability in stocks.
Crude oil bears may have seen their shadows signaling at least six more months of a bull oil market. Or is it six years? Even with reports of U.S. oil production driving more than 10 million barrels of oil a day, the decline in global oil stockpile continues to support the market. OPEC compliance to its production cuts are at a whopping 129% even as their production rose slightly.
Traders laughed off the International Energy Agency’s "no change in demand forecast" because it is clear to all non-biased readers that demand is going to grow in the next year. Their prediction of so-called "explosive” shale oil production growth is also being brought into question. For a major reporting agency using hyperbole like the word "explosive" seems like a desperate attempt to get attention and try to get attention to support the position of the consuming countries that they represent. We know that demand is strong and we are seeing it week after week.