RE: The MM's are buying Crude oil prices are rallying today on speculation that the U.S. Federal Reserve Board will soon move to spur growth while the 12-member OPEC cartel, now meeting in Vienna, will leave its current production ceiling unchanged.
In early afternoon trading, near-month oil futures are trading at more than $83.59 US a barrel in New York, up 97 cents on the day.
Meanwhile, worse-than-expected U.S. jobless claims this week have triggered expectations that Fed policy makers will unveil new measures next week to stimulate the sputtering U.S. economy.
“The worst things can actually be positive because it just gives more ammunition to the Fed and a greater chance that we’ll see something happen,” Jacob Correll, a Louisville, Kentucky-based analyst at Summit Energy, told Bloomberg News. “The expectation is that OPEC will keep production unchanged.”
Scotiabank commodity guru Patricia Mohr echoes those views, saying OPEC’s current official production target of 30 million barrels per day will remain unchanged. The Organization of Petroleum Exporting Countries is expected to release its official communique once meetings wrap up this afternoon.
“However, actual output by OPEC (including Iraq) has averaged 31.5 mb/d since January, with Saudi Arabia deliberately over-producing crude to offset the loss of Iranian oil due to sanctions,” explains Mohr.
” The Kingdom stepped-up its output to a 30-year high (10.1 mb/d ) in April to blunt skyrocketing oil prices, which threatened to derail an already fragile world economy. There is now a clear need for the Saudis to rein in supply to steady prices — a point made by many OPEC producers.”
Brent oil prices — the key international benchmark — have plunged from a peak of $128.10 US per barrel on Feb. 24 to a low of $96.81 on Wednesday — largely due to over-production and restocking by Saudi Arabia, says Mohr.
“The rejuvenation of U.S. domestic oil production from liquids-rich shales and ‘tight’ oil has also been a factor, as has the normal seasonal weakness in world oil demand in the second quarter and concern over global growth. However, over-production by Saudi Arabia has been by far the largest contributor to lower world oil prices.”
Mohr says it is “not surprising” that recent comments by the Saudis on their oil production policy have been “ambivalent,” in view of the European Union embargo on Iranian crude, which takes effect July 1. The embargo prohibits all purchases or handling of Iranian crude by EU-registered companies.
“There is considerable ‘event risk’ for oil prices in the coming weeks,” notes Mohr, “including the Greek election on Sunday and the meeting between Iran and the five members of the United Nations Security Council plus Germany on June 18-19 — in an attempt to cut Iran’s uranium enrichment. While financial markets seem to believe a diplomatic resolution is near, in my view, the outcome remains quite uncertain.”
Mohr takes a somewhat more bullish view on oil prices for the second half of 2012.
“Saudi Arabia will likely quietly cut its production in coming months — as current output levels are unnecessary and risk further dragging down oil prices. Global demand will also pick up seasonally in the third and fourth quarters, with the ’call’ for OPEC output rising from only 29.4 mb/d in the second quarter to 30.8 mb/d in the second half of 2012 — underpinning prices.”
Should prices for Brent fall below the $90 mark in coming weeks, says Mohr, “OPEC would likely convene an ‘emergency’ meeting, with many members such as Kuwait believing $100 to be a ‘reasonable and acceptable’ price.”
The ramifications for Canada – and Alberta in particular – are significant, Mohr notes. Crude oil and refined petroleum products accounted for 28.5 per cent of Canada’s overall net exports of all commodities and resource-based manufactured goods in 2010.