Is the Price of Crude Headed Up or Down?

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A report from Reuters Tuesday morning is pushing crude oil prices higher after a drop of about 3.5% on Monday. According to the news agency’s sources, Iran is “sending positive signals” that it may support a freeze on production at the OPEC meeting scheduled for next month.

West Texas Intermediate (WTI) for October delivery (the new front month) jumped to a high Tuesday morning of $48.32, after closing at $47.41 on Monday. Brent crude rose to a morning high of $50.21 on the report, up about 2.1% from Monday’s closing price of $49.16.

To say that oil market signals are all over the place is to understate what’s going on right now. The International Energy Agency (IEA) says the crude market is rebalancing, but that is arguable as we noted in an earlier report and in our wrap-up of rig counts and hedge funds positions last week.

On a fundamental level, Saudi Arabian production reached an all-time high in July. Freezing production at that level is hardly going to change market supply now that the end of the summer driving is just a couple of weeks away. And even if Saudi supply rose to meet increased demand for air conditioning, cooler weather just frees up more crude for export instead of generating domestic electricity.

Reuters also noted that Iranian production is close to its pre-sanctions level of 4.0 million to 4.2 million barrels a day. That depends on one’s definition of “close.” Iran’s July production totaled 3.6 million barrels a day. Iran officials have said that once the country reaches pre-sanctions levels of output, it will be more amenable to a production freeze.

Russia has indicated that it also will consider a freezing production once it sees an OPEC agreement on a freeze. If the Russians actually do follow through and freeze production, that only means that its production, too, is set a near-record highs. And Russia’s record of cooperating with OPEC or anyone else on oil production and pricing is lousy. Typically, if Russia can produce and sell a barrel at whatever price it will do so.

U.S. production, which has been declining, also may be setting up for an increase as more rigs are put back to work. At a stable price of around $50 a barrel, some U.S. producers can easily post a profit. At $55 a barrel, many more shale producers can turn a profit. Rising prices will tend to raise drill rig counts, which will raise production, which tends to reduce prices. Rinse and repeat.

As the master (Yogi Berra) once said, “It ain’t over til it’s over.” And until a freeze is agreed and stuck to, expecting crude prices to rise and stabilize at $60 or $70 a barrel is probably wishful thinking.