Crude Declines on OPEC Comments

In a marked departure from prior comments there appears to be a new sentiment emerging from the OPEC delegates prior to Wednesday's meeting. The new consensus building appears to be "prices are too high and threaten the global economic recovery." I can't believe the "market is well supplied" mantra is changing to a concern over the global economy but then these are just sound bites for consumption before the meeting. Anything is always possible. Could our lousy ISM and NonFarm Payroll reports last week actually have rekindled recession fear in OPEC delegates?

Another delegate provided the best sound bite. In reference to the potential for OPEC to raise quotas he said, "Why bother? Everybody is pumping what they want anyway and getting more money than they expected." Finally a speaker of the truth!

Phil Flynn of PFG Best said "Saudi Arabia is promising to increase oil production against the wishes of Iran" so the market is pricing in additional production. Iran's representative to OPEC responded with "the Islamic Republic is against any increase in OPEC output." Since Iran and Saudi are mortal enemies and one way to cripple Iran further would be to drive down the price of oil it would make sense for Saudi to use its excess production as a weapon. They have done it several times in the past so historically it would have an established precedent.

Tehran's new caretaker oil minister Mohammad Aliabadi will appear as Iran's delegate to the conference according to the Iranian news agency on Monday.

JP Morgan analyst, Lawrence Eagles, said the actual production is not relative. It is the appearance of additional supply evidenced by a higher quota that would sooth concerns over the Libyan shortfall and higher prices. I have said numerous times a quota hike would just be political theater designed to take OPEC out of the spotlight as the cause of high oil prices. Apparently Eagles agrees with me.

Those sentiments, whether true or speculative, removed some support from crude on Monday with $1.21 drop to settle at $99.01 for WTI. Prices are still declining late Monday night with crude at $98.36.

Also helping push prices lower was the news the Keystone pipeline was restarted on Sunday. That is really just a new blip more than any material drop in supply. With the pipeline reopened it won't take them but a few days to pushed the delayed barrels down the line.

Without any ugly economics on Monday the dollar rose after Dallas Fed president Richard Fisher said the Fed had done "enough if not too much" to stimulate the economy and "one has to question the efficacy" of doing more. While "it's going to be a very slow slog" for the economy the U.S. should grow at more than a +3% rate in the second half of the year.

His comments suggested there would not be a QE3 program or an extension of the current QE2 program. That strengthened the dollar and helped push commodities lower.

Quite a few investors appear to be sitting on the sidelines ahead of the OPEC meeting. With the equity market plunging daily there does not appear to be a lot of appetite for risk. While analysts believe any OPEC announcement of higher quotas will simply be legitimizing current excess production there is always a chance calmer heads will prevail and there will actually be a production increase.

After the announcement will be the time investors will jump back into the market. Any actual production increase will be effective at some point in the future, probably July 1st, but it will be 60-120 days before that oil will start to be seen in the market. Currently the market is well supplied at least in the USA with inventories at multiyear highs. Demand has not increased enough in 2011 to dent those supplies and demand has been sliding up until last week. The inventory reports on Wednesday will be very interesting and are expected to indicate demand increased over the holiday.

The EIA will release its Short Term Energy Outlook on Tuesday and attempt to predict future production and demand. Traders may also be waiting on the sideline for that data even though it is not normally a market mover.

Gasoline prices dipped slightly on Monday to $3.771 per gallon for the national average. That is better than a 20-cents decline over the last month but still more than a dollar higher than the same period in 2010. The Oil Price Information Service (OPIS) reported that 13% of U.S. stations are still selling gasoline for more than $4.

Just six days into hurricane season and a large tropical depression has formed 125 miles south-southwest of Grand Cayman and NOAA claims it has a 40% chance of turning into a tropical cyclone over the next 48 hours. If it did turn into a hurricane it is perfectly positioned to squeeze between Mexico and Cuba and target the oil patch and New Orleans. There are quite a few things that would have to occur for that to happen but the threat is there.

Tropical Storm Chart

Jim Brown

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