On October 22, US crude oil prices rose 1.6% and settled at $54.16 per barrel. Notably, the S&P 500 Index (SPY) fell 0.4% on the same day. Based on a Reuters report, Saudi Arabia is pressuring OPEC and non-OPEC members for 100% adherence to the production cut deal. Currently, Saudi Arabia is pumping 300,000 barrels per day below its target output. This might have supported oil prices despite bearishness in the broader market.
Moreover, Saudi Arabia is persuading other members to support a further production cut to counter the fall in demand next year. In Q1 and Q2 2020, global oil supply is expected to exceed the demand figure by at least 1 MMbpd (million barrels per day).
The model assumes that Saudi Arabia production returns to the pre-attack level. Furthermore, the OPEC output should be constant at the September level. In our view, 100% adherence to the existing agreement plus an additional plan to reduce output is the immediate need. If OPEC and non-OPEC nations fail to enforce the further production cut in December’s meeting, oil prices could crash.
Oil prices and US production
In the week ended October 11, US oil production was 12.6 MMbpd. Oil production was at a record high for the second consecutive week. Based on the EIA’s STEO report, US oil production could rise by 0.9 MMbpd in 2020 on a year-over-year basis. On average, US oil output is estimated to rise 1.3 MMbpd in 2019 on a year-over-year basis. This surge in production could hamper the efforts by OPEC+ to stabilize crude oil prices.
So, OPEC+ must implement a further cut of at least 1 MMbpd to counter the rise in US crude oil supplies. The current output cut is around 1.2 MMbpd.
API inventory data
On October 22, the American Petroleum Institute (or API) released its inventory report. Although the Reuters poll estimated a rise of 2.5 MMbbls in oil inventories, API reported a rise of 4.45 MMbbls. Moreover, API’s gasoline inventories fell by just 0.7 MMbpd. Reuters’ poll suggested a decline of around 2.4 MMbbls in gasoline inventories for the previous week.
Bearish inventory data could reverse any rise in oil prices. Today, the EIA plans to report the inventory data. Please read EIA Inventory Data: Oil Could Decline in the Next Week for an overview of the required change in the government data.
Oil prices’ moving averages
On October 22, US crude oil active futures were 2.2%, 2.6%, and 4.9% below their 50-, 100-, and 200-DMA (day moving averages), respectively. On the same day, US crude oil prices moved above their 20-day moving average for the first time since September 24. Prices above the short-term moving averages indicate short-term bullishness in prices.
However, oil prices have been lower than their 100- and 200-day moving averages in the last five weeks. The continue bearishness in oil prices could trouble concern in the United States Oil Fund LP (USO). USO invests in US or WTI crude oil prices.
With the 10th consecutive year of economic expansion in the United States, gasoline demand has also soared. In the last decade, gasoline demand has risen 10%. Usually, gasoline demand peaks during May and August. This data is based on gasoline demand for the last six years. Notably, this coincides with the seasonality of vehicles miles traveled (or VMT).
The summer driving season in the US starts in April and ends in September. The gasoline demand usually reaches its highest level in July and August. The Labor Day holiday weekend, which concludes on the first Monday in September, is also an important driver for gasoline demand. Gasoline demand also rises during the Memorial Day weekend, which ends on the last Monday in May. So, gasoline demand could be weaker in the next few months.
Any weakness in oil prices could impact upstream stocks like Chesapeake Energy (CHK). On a year-to-date basis, US crude oil active futures have risen 19.3% as of October 22. However, CHK’s stock price declined by 35.7%. WTI crude oil active futures near $50 per barrel might have impacted CHK’s margin.
Reuters reported that between January and September, China’s oil import has risen 10% than the same period in 2018. Year-to-date oil imports total 369 million tonnes. China is the largest importer of oil in the world.
However, China’s GDP is expected to grow 5.8% in 2020. This year, the GDP growth rate is expected to be 6.1%. This could be the slowest growth rate since 1990. As the world’s largest importer of oil, weakness in China’s growth rate should impact global oil prices. Moreover, the US GDP expansion rate could also decelerate. Please read China’s Slowdown: Will Trump Get Better Terms? to learn more about the global slowdown.