Crude: No commitment?

The Organization of the Petroleum Exporting Countries (OPEC) backed from a strong commitment to raise oil production but only promised to work together and stressed the need for continued cooperation between oil producers, as opposed to signaling an actual number on an expected production increase. 

The sharp break in prices and concerns from smaller members about the increasing output from U.S. shale producers put the cartel back on their heels. While we heard reports that Russia’s largest oil producer Rosneft (ROSN.MM) will be able to restore 70,000 barrels per day (bpd) of oil output in just two days if global production limits are lifted according to Reuters, the cartell will want to monitor market conditions before they break the news and break the market.

That along with trade war uncertainty kept the pressure on oil as traders feared the possibility of weakening demand at a time of rising U.S. production. The EIA reported a record-breaking 10.47 million barrels per day (bpd) last week that helped break prices even though oil inventories are still well below average.

Yet, warnings about demand also weighed on the sentiment. Bloomberg News reported that the International Air Transport Association (IATA) cut its profit target for the global aviation market this year, predicting lower returns than six months ago as rising fuel prices and labor costs eat into the industry.  Net income for 2018 is likely to total $33.8 billion, 12% lower than a December forecast for $38.4 billion, due to higher fuel costs as well as labor shortages driving up prices. Even American Airlines is sending signals that if prices of jet fuel don’t normalize then prices for airline tickets could rise. 

Yet, with stocks shaking off trade war fears, the fears of oil demand destruction may be exaggerated. If that is the case the possibility exists of underinvestment in future supply. While oil traders are pleased with record U.S. output, the reality is that pipelines and labor are reaching their point where supply will have to level out. Even OPEC is warning about the lack of investment that will tighten future supply.

Because we expect that supply will tighten more in the coming weeks, we feel that the oil price correction is close to being over. Even though we may see a few more bad days, buy the breaks. We should see new highs by the Fourth of July. Distillates are still very tight. We could see a spike as we get close to expiration.