As you might have noticed, oil prices got a bump over the past 8 days from two things: 1) war, and 2) a headline out of Saudi Arabia that suggested Riyadh backs the extension of production cuts.
Of course we also got the weekly API vs. EIA headline hockey which this week saw the DOE draw (2.16m bbl, so a bigger draw than estimates) overshadowed by rising production and a record stockpile at Cushing resulting, ultimately, in bearish price action.
At the end of the day, it’s always the same story: ramped up US production versus OPEC/non-OPEC production cuts keeping things in a tight range with occasional breakouts induced by either deflationary reality suddenly setting in (see the early March plunge during CERAweek) or some exogenous shock (Trump deciding to test out America’s “brilliant,” “genius” missiles).
As for OPEC there seems to be an underlying “plan” (if you want to call it that) to get to a kind of Goldilocks equilibrium where prices are just high enough to suit the interests of cartel members, but just low enough to keep the US shale complex from going nuts.
That’s the context for a piece out Friday from WSJ, excerpted below.
Some of OPEC’s biggest oil producers, including Saudi Arabia, are now targeting $60 a barrel as the level where they want to push crude prices, OPEC officials said, signaling they will support additional production cuts next month.
Saudi Arabia, Iraq and Kuwait believe $60 a barrel will lift their economies and allow for more energy-industry investment, the officials said, without jumpstarting too much American shale output, which can be ramped up and down with prices more easily than most oil production.
The countries had been targeting $55 a barrel, a level they have largely achieved with an Organization of the Petroleum Exporting Countries production cut of 1.2 million barrels a day. Saudi Arabia, Iraq and other members of the 13-nation cartel have signaled they will push to extend those cuts for another six months on May 25, when they meet in Vienna.
“Iraq wants prices to rise to $60. This our aim,” said Iraq’s oil minister Jabbar al-Luaibi in an interview. People familiar with Saudi and Kuwaiti oil policies confirmed those countries also now want $60 a barrel.
OPEC members’ ideal price for oil is in some ways symbolic, as there are unpredictable variables that influence crude’s price—from Chinese oil demand to supply disruptions in Libya to American oil-drilling technological advances. In 2013, then oil minister for Saudi Arabia, Ali al-Naimi, declared $100 a barrel a “reasonable price” for consumers and producers; the next year, oil prices collapsed.
But OPEC members’ target price offers a window into how serious they are about using their supply power to affect the market. So far, OPEC members have been more compliant with their oil-production agreement than in years past, with almost all of the cut being carried out.
Other OPEC members, including Iran, could upend the plans to reach $60 a barrel. But Saudi Arabia, Kuwait and Iraq—while not always aligned on oil policy—represent oil industries that produce over half of OPEC’s total production.
When you think about that, you might also want to consider the following chart from BofAML when it comes to what the “right” price is for discouraging US production…