Not yet, we say. It would be easy to get carried away with the popular sentiment behind crude’s return to strength this week, and succumb to the view that it would only go up from here, especially after the massive stock draws in the US and the first signs of US shale resurgence possibly faltering. We would caution against extrapolating from a week’s data to assume that we are finally getting rid of the stubborn oversupply that has haunted the oil markets for the past three years. A drop in Saudi exports in August could tighten the market for that month, but the fact remains that OPEC is still without a strategy to counter the sharp rise in Libyan, Nigerian and US production that is wiping out nearly three-quarters of the pledged OPEC/non-OPEC cuts.
Brent and WTI futures rallied by a cumulative of more than 3% each between Monday and Thursday this week, partly in response to Saudi Arabia’s declaration of intent to crimp its crude exports in August, but mostly in response to a massive draw in US commercial crude stockpiles and a weekly decline in the country’s crude production.
An escalation of geopolitical tensions involving the US, and coincidentally erupting in several directions at once, helped fuel crude’s rally with a “fear premium”, albeit one that will be hard to assess before all the pieces fall into place.
It is a summer of sanctions and sabre-rattling. Venezuela, Iran,Russia and North Korea have all come under varying degrees of threat of new or tighter US sanctions in recent days. Three of those are major crude producers and exporters.
If you decided to run with the crude bulls this week, you were in a majority. The fresh price-supportive factors appeared to overwhelm the previous bearish elements. However, here are the risks to keep in mind before concluding that crude will be higher for longer hereafter.
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Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions