Crude got a little bump early on Monday morning as the OPEC rumor mill goes into overdrive ahead of this week’s meeting in Vienna.
Over the weekend a predictable rift opened up between those members keen on appeasing Donald Trump by increasing production to help “consumers” and those who think Donald Trump shouldn’t be the guy pulling the strings here given his penchant for sanctioning oil producers.
Specifically, Iran’s OPEC representative Hossein Kazempour Ardebili said this:
We as Iran, and I hear Iraq and Venezuela, are against any increase in OPEC production. I am confident many other OPEC members feel and act the same. Our OPEC and DOC agreement has a date until end of the current year. We call upon our brothers in OPEC and Russia that we do not need to appease Trump, who sanctions two OPEC founders and also Russia.
That makes sense from a kind of “brotherly love” perspective, but then again, there’s no love lost between Tehran and Riyadh and the idea that the Saudis are going to spurn Trump because Iran said so is laughable.
Still, Riyadh is walking a tight rope here. Although they pledged to replace any Iranian barrels lost to sanctions, reports out prior to Trump’s April OPEC tweet indicate the Saudis ultimately want $80/bbl at least and possibly even $100. This is well-worn territory, but it’s always worth briefly rehashing. Higher prices help drive up the valuation of the Aramco IPO and while pushing prices up risks emboldening previously uneconomic U.S. supply which in turn imperils market share, that might be a gamble to Kingdom is willing to take. As I’m fond of quipping, there’s only so much money you can extort from your relatives on the way to replenishing SAMA reserves.
Of course Riyadh is also cognizant of the effect higher prices have in terms of bolstering Tehran, whose regional influence has expanded significantly over the past several years thanks in no small part to Hezbollah’s success in propping up the Assad regime in Syria and the Houthi war of attrition in Yemen. And don’t forget the fact that the Quds basically control Iraq.
“Saudi Arabia would be unlikely to use an ‘oil weapon’ to lower oil prices, though might it want to raise output to mitigate the geopolitical impact of an Iranian oil revenue windfall?”, Barclays asks, in their OPEC preview, before answering their own question as follows:
The Saudis can raise output without lowering price and they have stated that they expect increases in production will be gradual. Second, Iran is far more insulated than many other GCC countries from lower oil prices, so lower oil prices may not be an effective method to influence Iran’s foreign policies. That is not to say it is not an important source of revenue for the country, but such a strategy may be met with opposition in the region and in Saudi Arabia, also with consideration of Vision 2030 implementation underway.
That latter bit – the part about Vision 2030 – speaks to the necessity of keeping the oil revenue steady as MbS embarks on his ambitious reform initiatives.
Barclays goes on to note that all of that aside, “Saudi Arabia may not want to be perceived as doing President Trump’s bidding.”
That brings us to Monday morning’s news. Here’s Bloomberg:
OPEC members are discussing a compromise agreement that would see an oil production increase of between 300,000 and 600,000 barrels a day over the next few months, according to people briefed on the talks.
While Iran said on Sunday it’s opposed to any increase to current quotas, officials from a number of other countries are optimistic that an agreement can be won for a relatively modest hike at this week’s meeting in Vienna, the people said, asking not to be named discussing private conversations.
That headline hit at 4:40 AM ET and the effect was immediate:
That 300,000 and 600,000 barrels a day figure is considerably less than what most folks were anticipating.
You can read BofAML and Barclays’ predictions in the first post linked above, but more interesting is Goldman’s take. The reason it’s interesting is because in the wake of Al-Falih tipping a supply increase to appease Trump, the bank was out suggesting that the news wasn’t necessarily as bearish for crude as the market seemed to be pricing in. Recall this:
While [Friday’s] announcement lifts some of the uncertainty on whether and when OPEC and Russia would increase production, we do not view this as a material change to our bullish oil outlook: (1) this response is occurring because of a tight oil market, (2) its magnitude is still uncertain but, even at 1 mb/d, such an increase would simply offset the involuntary production declines with the group still committed to restraining output, (3) even at 1 mb/d, its gradual implementation would leave the market in deficit through 3Q18
Again, that’s from two weeks ago and if you’re wondering whether Goldman has changed its tune on the bullish outlook for crude, the answer is “no” (you might also recall that the bank is extremely bullish on commodities in general).
In an expansive new note that runs some 40 pages, the bank takes a “deep dive” into their bullish oil view, but for our purposes here, I’ll just excerpt from the executive summary, which contains these passages with regard to OPEC, trade wars and the market more generally:
Our base case is that core OPEC and Russia increase production by 1.0 mb/d over 2H18 but that declines among other participants to the cuts leave production up only 0.45 mb/d from 2Q18. On the demand side, we still forecast above-consensus demand growth of 1.75 mb/d yoy in 2018, as the largest EM and DM consumers continue to exhibit the strongest growth. Out of caution, we have nonetheless reduced this forecast by 100 kb/d. And while trade tensions have re-escalated, our economists expect minimal global growth impacts, with the latest US and Chinese tariffs simply pointing to redirected crude flows.
We now forecast a moderately tighter oil market through 2Q19 than previously despite core OPEC and Russia production reaching new record highs by next summer and inventories already below normal levels. While concerns over OPEC production and demand may continue to weigh on prices in the near term, this leads us to reiterate our forecast for Brent prices to rally further, with risks to our peak $82.5/bbl forecast still skewed to the upside later this year.
There you go. And you might remember than in their last update on this situation, Goldman reminded you that “history shows increases in OPEC production quotas in a strong demand environment (like today) are followed by higher prices in the subsequent months.” Here are the visuals on that for anyone who might have missed them:
For his part, SocGen’s Michael Wittner was out with something on Monday that looks pretty prescient considering the overnight news. Here are some quick excerpts from his projections:
We believe that Saudi Arabia and Russia will prevail at the meeting, and they will successfully lead OPEC/non-OPEC to a moderate, limited, and cautious increase in actual production. This would achieve the Saudi and Russian goal of stabilising supply and prices, without shocking the market. This can even be done within the current OPEC production target, because their latest/current output is 0.7 Mb/d below the target. OPEC/non-OPEC would still have to decide on the details, including whether to suspend individual country targets or not.
But one way or another, we believe that Saudi Arabia, the UAE, and Kuwait (core OPEC) will increase by a combined 500 kb/d, beginning in July, with most of the increase going to the Saudis. The focus will be on replacing Venezuelan losses, and not on offsetting the impact of Iran sanctions, simply because the size of the impact on Iran is not yet known. That will be dealt with at the next meeting in November or December, if required. We also expect Russia to increase gradually, by 200 kb/d within two to three months. Both core OPEC and Russia could increase further, but we don’t think they will do so right away and will wait to see if it is needed or not.
Again, that looks bang inline with what was reported overnight.
Another interesting part of Bloomberg’s coverage was this, about Russia:
OPEC officials are also working on putting the cooperation between the cartel, Russia and other oil producers — the so-called OPEC+ group currently comprising 24 nations — on a permanent footing. That would be a major diplomatic breakthrough for Riyadh and Moscow after just two years of cooperation on oil policy.
The prospect of binding Russia, the world’s largest exporter after Saudi Arabia, more closely to OPEC might help persuade Iran and Venezuela, another skeptic about the need for an increase, to back higher production in the second half of the year.
Clearly, that has all manner of implications going forward, and while that’s well beyond the scope of anything I want to write about on Monday morning, it raises important geopolitical questions.
Whatever the case, a wild card here will be Donald Trump. The problem with reports that suggest his tweet did indeed “move the Saudis” is that it sets a precedent by letting the market know that he can indeed have an impact on OPEC’s decision calculus simply by tweeting about oil prices while subjecting an egg McMuffin to his loose dentures.
I certainly hope – for traders’ sake – that we’re not in for a week of David Dennison’s real-time commodities commentary, but don’t rule it out.