Bearishly construed rhetoric out of the Saudis overshadowed a plunge in the greenback. Consequently, the energy liquids complex took a header to start the new trading week. Lyondell’s shut-in of a cat cracker and Enbridge’s February allocations only fueled the Street’s agita, who, as we noted yesterday, owned more than 4× the physical capacity of the Nymex hub as of last week.
For starters, the euro hit a two-month high, 1.3686, yesterday (Monday) which upon first blush might seem consequential. However, first looks are often misleading. Over the last two months the daily correlation between Nymex WTI values and the euro/dollar cross has plunged from .784 (strong) to .336 (not strong) and the coefficient of determination (R2) has dropped by 240 bps to 49.9%.
In other words, the intuitive assumption is less than half of yesterday’s movement in oil can be explained by the movement in the dollar.
Meanwhile, the bears got all excited by some comments from Saudi Arabia’s oil minister, Ali Al-Naimi, who in a speech in Riyadh noted that… “Some OPEC countries will increase their production capacities, thus maintaining OPEC’s spare capacity at approximately 6 MMbbl/d.” The obvious assumption is that by “some OPEC countries” Al-Naimi was saying Saudi Arabia.
"At $92.58, producing nations (OPEC and non-OPEC alike) are going to produce oil, regardless of what the official ceiling is."
As Captain Renault might say, we are shocked, shocked to find the Saudis protecting their market share by talking $100 crude oil off of the ledge.
On the other hand, why are Al-Naimi’s comments so bearish now? After all, +$90 crude oil is hardly conducive to stringent compliance to OPEC’s production ceiling amongst its also-rans. The producer group’s compliance with its current quota was estimated at only around 53% in December; and that was when the daily OPEC basket averaged only $88.46. Through the first three weeks of January OPEC’s oil is averaging $92.58.
As discussed in today’s issue of The Schork Report, Al-Naimi was simply stating the obvious: at $92.58, producing nations (OPEC and non-OPEC alike) are going to produce oil regardless of what the official ceiling is.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.