I suppose it’s only fitting that Goldman is out this afternoon reiterating their relatively bullish call on crude.
After all, Donald Trump took aim at OPEC during his address to the U.N. General Assembly on Tuesday, accusing the cartel of “ripping off the world”.
Trump’s latest OPEC broadside came two days after a ministerial meeting in Algiers failed to produce the kind of pandering the President expected following renewed Twitter calls for lower prices.
The administration’s “tough on Iran” policy is “working”, where that means compelling America’s allies to cut imports of Iranian crude to zero by November. In fact, India expressed their intention to acquiesce to the State Department’s demands just hours after Trump’s U.N. speech.
The problem with the renewed sanctions push is that it invariably puts upward pressure on crude prices and, in turn, prices at the pump. Higher gas prices could end up eating away at the gains Trump assumes are accruing to U.S. consumers from the GOP tax cuts. Hence his calls for lower oil prices.
But the President can’t have it both ways. OPEC+ tried to placate him in June, but the meeting in Algiers betrayed a reluctance on the part of the Saudis to produce crude that nobody wants. On top of that, lifting production risks reducing space capacity that would otherwise be available in the event of unexpected supply disruptions going forward.
That’s not mere speculation. Everyone understands it, except, apparently, Donald Trump. Here’s something Lisa tweeted on Tuesday morning, for instance:
The biggest oil producing nations don't have that much capacity to pump more crude, raising concern that prices could rise if there's further disruption in Libya, Iran or Venezuela. Here's a chart of how much OPEC nations could produce less the amount they're currently pumping. pic.twitter.com/sbhPTNX4Qf
— Lisa Abramowicz (@lisaabramowicz1) September 25, 2018
In any event, Goldman is out with a fresh look at the situation in light of oil’s recent push to the upside and the decline of Iranian exports.
“The catalysts for this last rally appear clear”, the bank’s Damien Courvalin writes, before listing those catalysts as follows:
- Iran exports have declined faster than we (and consensus) had expected,
- OPEC failed to deliver a commitment to strongly increase production over the weekend,
- global growth (especially EM) expectations are stabilizing and China restocking is occurring.
“While this set up can likely keep prices in the low $80s/bbl initially, consistent with our view that the initial decline in Iran production could bring prices to $82.5/bbl, we believe another supply catalyst beyond Iran would likely be needed for prices to meaningfully break to the upside”, Goldman goes on to say, suggesting the bank doesn’t think prices are likely to explode higher anytime soon.
Here, according to Courvalin, is the bottom line (and this takes account of Trump’s U.N. speech and also the prospect that the U.S. will end up tapping the SPR in an effort to avoid the politically sensitive issue of high gas prices into the midterms):
Net, we continue to expect that the decline in Iran exports will reach 1.4 mb/d, and while it is occurring faster than we had previously expected, we continue to expect it to remain offset by a faster ramp-up in production from other producers. Such an outcome is also consistent with President Trumps speech at the UN today, September 25, where he focused on both keeping sanctions in place on Iran and admonishing OPEC to do more to reduce oil prices. In addition, an additional large increase in prices from current levels would likely lead to an SPR (Strategic Petroleum Reserve) release by the US administration ahead of the US Midterm elections in early November. Such a release would likely be of 30 mb over 60 days (only requiring an executive order), which would be equivalent to a 0.5 mb/d increase in supply over two months. As a result, and in the absence of any further disruption, we reiterate our view that Brent prices will stabilize back in their $70-80/bbl range into year-end.