By Dominick A. Chirichella | June 13, 2011 12:00 PM GMT
The post OPEC meeting premium is pretty much now out of the price of oil as WTI remains below the $100/bbl level while Brent is trading off of its highs but is still showing a gain above where it was trading prior to the OPEC meeting. Part of...if not all of the gains that are still in the price of Bent may be more related to the light loading program in the North Sea for the month of July rather than the failed OPEC meeting. As discussed in detail last week OPEC is in a bit of disarray with Saudi Arabia now seemingly in a position to act alone in its efforts to add more oil to the market place and cap any runaway price increase in the short term. All of the surplus crude oil capacity resides in three OPEC member countries...Saudi Arabia, Kuwait and the UAE with the bulk of it in Saudi Arabia. It is this group of OPEC countries led by the Saudi's that pushed for a 1.5 million barrel per day increase in production that was rejected by the majority of the remaining OPEC members who do not have any surplus capacity.
Since the meeting there have been discussions in the market regarding Saudi Arabia increasing production for July forward. A report in the Saudi based al-Hayat newspaper on Friday indicated that the Saudi's planned to increase production to 10 million bpd in July versus 8.8 million bpd that they produced in May. Although that report was not confirmed by other independent media sources the market felt there was enough credibility to the story as prices declined strongly on Friday and have not recovered any of those losses yet today (in fact additional losses are now occurring). In Asian trading hours there have been reports that the Saudi's are offering additional crude for July to the Asian refiners...pretty much their target market for adding oil as this is where demand growth is expected to be the most significant going forward. Whether or not the article in al-Hayat was accurate the Saudi's are offering additional crude oil to the refiners signally that there is potential for more oil to flow in the coming months. Whether the market needs this oil in the short term is a whole another question. But in my view if the Saudi's are able to put more oil in the market it would certainly be bearish and if the Saudi's are unable to add more oil based on lack of interest from the market (a possibility) it would also be a bearish indicating that the demand growth all are projecting may not be materializing. In either scenario the Saudi's are on their own to meet any additional demand from the market that materializes. They said they would do that and there is every reason to believe they will follow up on their commitment. This should keep a cap on prices in the short to even medium term.
Risk asset markets were mixed last week. Oil prices (with the exception of WTI) held up pretty well considering the magnitude of the sell-off on Friday. The geopolitical based oil risk premium is still in place but the way oil has been trading (basis WTI) I would expect trading to remain choppy in a trading range of around $94.50 to $104/bbl. Financial markets were mostly lower on the week on an overall slowing of the global economy sending negative signals to the market sentiment along with the evolving sovereign debt issues in Europe. Equity markets were lower in both the developed and developing world markets...led by the Asia economies as inflation fighting continues in that region of the world followed by slowing in the developed world. Precious metals hovered near the unchanged mark for the week ending the week with minor losses.
