The Daily Dose; Told Ya So, Says Bob Dudley

-The lower-for-longer mantra was prophetic

-US crude oil inventories skewed by temporary factors.

The computers are taking over the market. Crude oil prices were up in early morning trading after the American Petroleum Institute reported yet another draw on US commercial crude oil inventories. Data, however, are skewed by the impact of Hurricane Laura, which has lingering impacts on US refining and production capacity. And even though the headline writers in the financial press are ringing the bells of optimism, Exxon is considering redundancies. In OPEC, meanwhile, patience is wearing thin. Welcome to dystopia.

The price for Brent crude oil was up a modest 0.77% in morning trading after the API reported a drain on all major commodities to trade at $45.93 per barrel at 8 a.m. ET. The rally will be tested by US employment data and federal data on inventories late in the morning.

The American Petroleum Institute reported total US commercial crude oil inventories dropped by 6.3 million barrels, gasoline declined 5.7 million barrels and distillates, which includes diesel, dropped 1.4 million barrels during the week ending Aug. 28. Those data are skewed largely by the impact of Hurricane Laura. The US Bureau of Safety and Environmental Enforcement reports 28% of the total US offshore oil production and 25% of the total gas production is still offline, long after Laura passed. With little going in last week, a draw is almost a given. Some refining activity is still idled, though Motiva’s 607,000 barrel-per-day refinery in Port Arthur and others will restart later this week.

Oil prices, despite the rush, remain stuck at around $45 per barrel for Brent. And a handful of analysts responding to a survey from the Reuters news service expect it to stay there for a while. Remember, it was Bob Dudley, then the head of British oil giant BP, who introduced the “lower for longer” mantra some four years ago. At the time, Dudley said he was preparing his business to do well at around $50 per barrel. Last year, much ink was spilled over the yield-curve inversions in the US market that usually pre-date a recession and a rally in tech stocks is masking otherwise bleak economic news, such as the huge miss in ADP payroll figures. Crude oil prices started the year in the $60 range, and collapsed into negativity under the pressure from the pandemic. Now, oil is stuck and those left on the back foot are starting to lose balance. A spokesperson from Exxon Mobil told Reuters there would be a reduction in headcounts.

“We have evaluations underway on a country-by-country basis to assess possible additional efficiencies to right-size our business and make it stronger for the future,” spokesman Casey Norton said.

That’s a reverse from its stance in July, but comes after the US supermajor announced plans to trim spending by around 30% this year.

Complacency, meanwhile, does little to eliminate problems and does even more to erode patience in problem-solving. The United Arab Emirates, an OPEC member now moving into the Western corner, pumped out about 2.6 million barrels per day, more than allotted for under voluntary production restraints. Like the rest of the legacy cheaters, the UAE said it would make up for the difference at a later date, but the temptation to cash in where it can may be overwhelming. For Kuwait, it seems it too forgot about Bob Dudley’s comments. As Dudley was sounding the alarm, the government spoke to deaf ears by recommending a shift away from the oil economy. Kuwait relies on hydrocarbons for about 90% of its revenue and life at $45 per barrel is clearly uncomfortable and the government has steadily ran a deficit. Not to be outdone, Iraq, one of the biggest cheaters under the OPEC+ umbrella, wants an exemption.

All told, weak hiring and supply-side pressures should add up to a headwind in the price of oil, though it may be the automated triggers pulling the strings of the rally.

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