The Energy ReportPhil Flynn
The Phil Flynn Energy Report Monday November 24, 2014
Cut or Not to Cut
To cut, or not to cut, that is the questionâ€”whether 'tis Nobler in the cartel to suffer the slings and pains of outrageously low oil prices to try to undermine the U.S. shale oil producer or to cut production and risk losing market share forever. For oil this week it is all about OPEC and how they can balance the conflicting short term needs of the cartel and their long term viability. The rise of the U.S. oil producer has made life very difficult for the old cartel and it is clear that there is no consensus on what to do. Saudi Arabia seems focused on the long game as it tries to outlast the shale oil production threat from the U.S. The Saudi's are ready for a showdown the question is if anyone else is?
Many producers in the cartel are already passed their point of pain especially Venezuela and Ecuador. While the Saudis might be able to sustain a price war there are many cartel members that cannot. There have been many rumors as that Iran will go to Saudi Arabia and try to get them to agree to a production cut of one million barrels. This might be a tough sell because the Saudi's and Iranians don't see eye to eye on anything, The problem is that if a million barrels is going to come off OPEC production, it will mainly be on the back of the Saudi's who won't act unless it can get some help from Non-OPEC producers like Russia, Mexico or Norway. Last week Iranian Oil Minister Bijan Namdar Zanganeh that Iran would not cut one single barrel oil yet this week he is going to be the voice of reason. Zanganeh says that he will propose to Saudi Arabia a production cut ahead of the OPEC meeting. I wonder how that is going to go over.
Besides according to estimates the globe is already being oversupplied to the tune of 2 million barrels a day so 1 million may not make a dent in the global oil glut. That is especially true if Non-OPEC producers fail to cut as well. In the end OPEC will come up with something. The most likely outcome is an adherence to production quotas and a possible mechanism to cut production in the future. Based on oil market trading action the trade is betting that whatever OPEC does it won't be enough. Even China's surprise stimulus and a very dovish Mario Draghi is not enough to keep oil going strong.
The good news is that gas prices continue to fall. Many times we have spoken about a new era of lower gasoline and oil prices and our predictions are coming true. The princess of petroleum Trilby Lundberg reported that the average price of regular gasoline fell another 10 cents a gallon over the past two weeks a national average of $2.84. That is a whopping 88 cent a gallon drop since last May. Trilby says that the highest price for gasoline is the city by the bay San Francisco where prices $3.14 and the lowest price in Albuquerque New Mexico at $2.47 a gallon.
A break in the cold weather is breaking natural gas! The story is that when it comes to gaps they are meant to be filled. On the Sunday reopen, natural gas filled a downside gap by trading below 418 yet left a big upside gap to do that. With another cold blast coming next week the trade will expect at least one more sharp rally. Volatility remains high in the natural gas.
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November 24th, 2014
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