With the price of West Texas Intermediate (WTI) crude trading at below US$45 a barrel, OPEC has gone bonkers all over the Middle East. That’s because the oil is less than two bucks away from US$42, a very critical support level. The commodity had tried breaching that level slightly more than a month ago on 5 May 2017.

Last week, JP Morgan was so convinced that crude oil is toast because OPEC didn’t know what they were doing that the American banker slashed its 2018 WTI forecast by a whopping US$11 – from US$53.50 to US$42. However, Saudi Arabia, the world’s biggest oil exporter, might have found a way to cheat the crude oil market.

WTI Crude Oil Prices Chart - 16June2017 - Below USD45

Saudi, the de facto head of the OPEC oil cartel, could only watch in disbelief as oil prices dropped to 6-week lows on Thursday, under pressure from high global inventories and doubts about OPEC’s ability to implement agreed production cuts. OPEC and its allies have promised to restrict output until at least March 2018 to try to drain surplus supply.

Last Wednesday, the oil crashed 5% after a jaw-dropping data showed a 3.3-million barrels “increase”, the opposite of what analysts had expected which was a 3.5-million barrels “decrease” in inventories. This Wednesday, crude oil tumbled 3% as inventories fell by 1.7-million barrels in the week ended June 9, as compared to analysts’ expectation of 2.8-million barrels decline.

Crude Oil Inventory - Walking on Drums of Oil

In short, crude oil inventories remain stubbornly high, which give a terrible headache to Saudi and its gang members. But the kingdom is not giving up. Realizing that crude oil prices depend heavily on the U.S. Energy Information Administration (EIA) data, Saudi may try to manipulate the data by using a low-tech cheating method.

Because U.S. weekly inventory data is the most frequent, visible and transparent source of oil storage data, this is the same place that Saudi would start unleashing its dirty trick. Saudi Arabia has a large refinery on the U.S. Gulf Coast. Like how an accountant cooks the balance sheet, Saudi plans to hold back some exports to the U.S. in July.

OPEC Comedy - Cut Production Cheating

With this cheating technique, Saudi hopes to cook a drop in the U.S. EIA’s report, and it could show up immediately in the import data and inventories as a bullish signal – a fake demand. By dropping exports to the U.S., obviously inventories would decline significantly. In the eyes of the public, it would look like inventories are really coming down, when in fact it isn’t.

Based on last week’s data, Saudi was estimated to have had supplied about 1-million barrels per day (bpd), out of 8-million bpd imported by the U.S. John Kilduff of Again Capital predicts that the U.S. inventories data could be reduced by 100,000 to 250,000 bpd if Saudi proceeds with its plan. In fact, Saudi has no more option left that its energy minister actually shares the cheating option.

Saudi Arabia Oil Production - Oil on Currency

Two days ago, OPEC revealed a surprising oil production jump in May, despite the cartel agreeing last month to extend its 6-month deal to cap output into March 2018. Production across OPEC rose by about 336,100 bpd to 32.1 million bpd, primarily thanks to increases from Libya and Nigeria, which are exempt from the deal, as well as Iraq.

Output from Libya has surged by more than 178,000 bpd to 730,000 bpd. In Nigeria, production was up more than 174,000 bpd to 1.68 million bpd. Meanwhile, Iraq, OPEC’s second-largest producer, contributed the third-biggest increase with a more than 44,000 bpd jump. Essentially, Nigeria has reclaimed the title of largest African producer in OPEC from Angola.

Nigeria Crude Oil Production

Amusingly, only 4 countries were producing at or below the levels they agreed to in November – Saudi Arabia, Angola, Kuwait, and Qatar. This is the classic example of which insiders have been saying all this while, that even within OPEC members there are widespread cheating. Nobody knows which producer has just pumped up production.

OPEC has revised down its forecast for non-OPEC oil supply growth this year by 110,000 bpd to 58.14 million bpd. However, growth in U.S. oil production alone is expected to outstrip much of the jump in global demand this year. OPEC projects total global demand will grow by 1.3%, or 1.27 million bpd. But U.S. supply is seen growing 5.8%, or about 800,000 bpd.

US Oil Production Shale Producers - President Donald Trump

Theoretically, analysts don’t think the crude would test US$40 level. It cannot happen and would not be allowed to happen. But the technical chart says otherwise. The high gets lower, while the low gets even lower. For now, only a genuine production cut can help OPEC but they’re not ready to lose market share. Perhaps manipulating EIA data could help.

– Finance Twitter