Crude: All On Board

Get on the OPEC/non-OPEC bandwagon! All other OPEC members are on board for the extension of production cuts leading to speculation that even a bigger cut might be in the works. Saudi Arabia’s energy minister, Khalid A. Al-Falih, said all producers have agreed to extend cuts by another nine months until global supply is back to the 5-year average.

The Saud Oil minister also said he sees signs that the cuts are starting to have an impact. He noted drops in floating storage as well as the streak of falling crude supply in the U.S. 

Compared to the last time when OPEC met, there is a lot less skepticism about the cartel’s ability to cut production. In fact, there has not only been record compliance by the cartel, now there is record belief by OPEC watchers that they will follow through with production cuts. The OPEC, along with its non-OPEC co-conspirators, have grudgingly earned respect from market watchers. You might be able to argue about the impact the cuts will have on supply, but you can’t argue that the cartel is not serious about getting the market in balance.

This is one reason why we still believe that oil will head back to $60.00 a barrel and longer term to $73.00 a barrel. Prices probably would have been higher sooner but releases from the U.S. Strategic Petroleum Reserve and floating storage kept oil inventories relatively high.  

We also are seeing demand rebound. Many were worried about gasoline demand but as I said before, it was being overstated in part because we had bad weather. Now gas demand is soaring. In fact, AAA is predicting that we will see a surge in demand this Memorial Day weekend, the traditional kick-off to the summer driving season. AAA says travel volume will be the highest since 2005. They project that 39.3 million Americans will travel 50 miles or more away from home. “That is one million more travelers than last year taking to the roads, skies, rails and water.”

Natural Gas Is making a big comeback. This comes even as weather-driven demand is expected to sink to its lowest level of the year in late May according to Andrew Weissman of ECB Analytics. The June natural gas contract tested support near the 200-day moving average for the fifth time in the past week. After support held, the forward curve rebounded modestly. Weissman says that forecasts Sunday trended warmer, particularly in the 6-10-day window, creating the potential for the rebound to continue. As the Memorial Day holiday approaches, however, cash market prices for natural gas are likely to weaken considerably, limiting the upside potential this week. Power sector natural gas demand is likely to decline 1.5 bcf/d this week as temperatures revert toward normal throughout the nation.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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