Daily Oil Fundamentals

Lack of Confidence

Downtrend has more than one definition. A chart reader would tell you that it is characterized by consecutive lower highs and lower lows. A seasoned trader would argue that what it means in practice is to sell rallies but not buy dips with the same zeal. Then the validity of the move south would only be thrown into doubt in case the latest peak is violated, due to bullish developments outweighing bearish ones in quantity and/or in quality.

Last week a plethora of issues from both categories provided fertile ground to move the market in either direction. The middle of the week saw a buildup in optimism as enhanced Chinese export/import figures, an unforeseen drop in US crude oil and commercial oil inventories and renewed Ukrainian assaults on Russian refineries raised the spectre of growing demand and reduced supply. The sudden and disappointing breakdown of truce talks between Israel and Hamas added more fuel to this fire and it signaled the intention of the Israeli prime minister’s reluctance to end the war any time soon – plausibly and partly because of his fight for political survival. Over the weekend reports of rising Chinese consumer prices implied demand revival.

The list on the other side is much shorter, yet more pronounced. The EIA, in its updated monthly report, expects looser oil balance and US rate cut expectations keep suffering blows. This week’s inflation data will undeniably serve as a beacon on the possible Fed action, but the current sentiment is anything but sanguine. In a nutshell, the lowering of the borrowing costs is more likely to occur in the UK and in Europe ahead of the US. Demand concerns are reflected in the weekly loss of more than 2% in the value of the CME RBOB contract echoing declining refining margins whilst the rest of the complex ended the week broadly unchanged thanks to the pivotal sell-off on Friday afternoon. Anxiety about interest rates is embodied in the performance of the dollar index, which remained resolutely stubborn against its major peers. The harbingers of any impending change in mood will come in the form of weakness in the greenback and improvement in crack spreads.


The fault lines in the new world order are painfully perceptible. Call it East against West, BRICS versus OECD or China staring in the eye of the US, the fact is that aspiration for political and economic dominance often disguised as ideological battles between the adversaries is getting ever more intense. There is an utter lack of desire for ‘rivalry partnership’ where the parties would compete where they must but co-operate where they can. There are tangible and seemingly irreversible attempts from both sides to prioritize national security and as a result to subsidize domestic industries greatly harming the mutually advantageous effects of globalization. One side believes that western democracy is in terminal decline, and illiberalism or autocracy is the answer, the other points to democratic recession, backsliding on free speech and exorbitant central intervention.

It is the latter two that are reminiscent to a hotly debated current affair in oil circles, which is taking place on this side of the newly established Iron Curtain, namely in the world’s largest oil producing/consuming nation, the US. One of the largest integrated oil companies, ExxonMobil acquired Pioneer Natural Resources last October in a deal worth more than $60 billion making it the biggest shale oil producer in the prolific Permian Basin. The US regulator, the Federal Trade Commission (FTC), whilst not intending to block the takeover, has banned the former CEO of Pioneer from being appointed to the board of ExxonMobil. According to the FTC, the move is deemed necessary in order to prevent him from ‘engaging in collusive activity that would potentially raise crude oil prices, leading American consumers to pay higher prices for gasoline, diesel fuel, heating oil and jet fuel’.

The root of the unanticipated step originates from around 2017 when meetings between OPEC and US shale producers, initiated by then-OPEC Secretary General Mohammed Sanusi Barkindo became regular occurrences. These get-togethers were ostensibly necessitated after OPEC’s unsuccessful price war against shale producers between 2014 and 2016 that sent the price of the European benchmark below $30/bbl in early 2016. Oil prices stabilized but there were no signs of collusion between OPEC and US shale producers as US output relentlessly climbed and reached 12.9 mbpd by the end of 2019, just before the pandemic struck, up from around 9 mbpd in 2016.

The health crisis, which saw Light Tight Oil output fall to 6.8 mbpd by May 2020, bankrupted several shale producers resulting in job losses and leading to inevitable consolidation in the sector. Learning from the pandemic-induced experience the era of ‘growth at any cost’ was well and truly over, shale investors refused to pour more money into the sector and demanded return on their past investments. It was around this time that the former Pioneer CEO pressured the Texas Railroad Commission, the energy regulator to consider mandating production cuts, something that is deemed anti-competitive behaviour by the regulator although back then it was aligned with Donald Trump successfully urging OPEC to reduce production. The industry became leaner and meaner and yet, what became conspicuous was that US shale output started to reliably pick up. Calls that predicted stagnating growth and inability to challenge the pre-pandemic output peaks proved to be misplaced. US shale production reached 10 mbpd at the end of last year and is consolidating just below that level in 2024, EIA data suggests, more than 1 mbpd higher than in 2019.

It is against this backdrop that the FTC barred the ex-CEO of Pioneer from the board of ExxonMobil. The regulator alleges that the former CEO attempted to collude with OPEC and co-ordinate output levels in order to keep prices high and maximize profit. In its complaint, the FTC cites the above-mentioned regular meetings between shale executives and OPEC as evidence of collusion. The timing of the ban is curious. Firstly, US shale is the major benefactor of the OPEC+ discipline to support the market and it is taking full advantage of it. Secondly, it comes 6 months prior to the US presidential elections, where one point of contention is sticky inflation in general and elevated pump prices in particular. One cannot help but conclude that the Orwellian move sends out an ominous message for the future seasoned with a dollop of hypocrisy. It appears that the US regulator/administration, just like OPEC, has a preferred price band. For them, the lower end is somewhere below $40/bbl basis WTI, and the upper pain threshold is just under $4/gallon in terms of retail gasoline price.

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© 2024 PVM Oil Associates Ltd

13 May 2024