And now, back to your regularly scheduled OPEC farce.
Oil of course plunged into a bear market this week and it’s not hard to explain why. Crude is caught in a perpetual push-pull dynamic. On the bearish side, there are concerns about global demand amid decelerating growth and rising U.S. crude stockpiles. On the bullish side, folks are fretting over lost Iranian barrels due to the reimposition of U.S. sanctions and the prospect that if the Saudis boost production to offset those lost barrels, spare capacity will be diminished, leaving the market vulnerable to other supply disruptions.
Obviously, the bearish arguments won in October, as crude plunged and Trump’s decision to grant Iran sanctions waivers to eight nations only served to exacerbate the downturn in prices. WTI is now below $60, Brent below $70 and volatility is at its highest since 2016.
Some of this is clearly due to the Saudis ramping up production at the behest of Trump. He was successful in setting the agenda for the June OPEC meeting and ultimately he was successful in compelling the cartel (along with Russia) to support a production hike in the back half of the year. That was no small feat, especially considering how irritated Iran was at the idea that OPEC was beholden to Trump’s Twitter account.
When that wasn’t enough to offset the threat of lost Iranian barrels, he pushed the envelope further, taking to Twitter in late June to (literally) announce that he had called King Salman on the phone and asked for a 2 million b/d unilateral increase from the Kingdom, a move which, if implemented, would amount to Riyadh effectively going rogue.
In late September, after prices pushed to fresh local highs, OPEC appeared to ignore Trump’s renewed demands for lower prices at a ministerial meeting in Algiers. Subsequently, Trump blasted the cartel at the U.N., accusing them of “ripping off the world.”
Shortly thereafter, oil prices careened sharply lower and the rout gathered steam this week, as record U.S. production, the highest OPEC production since 2016 and the Iran sanctions waivers conspired to push WTI lower for a tenth consecutive session through Friday, the longest losing streak since 1984.
It’s with all of that in mind that some OPEC and allied producers on Sunday suggested they may need to cut output lest a supply glut should end up leading to another collapse in prices. “There’s too much in the market, and we’re going to go back where we were [in 2014] if we’re not careful,” Oman’s Oil Minister Mohammed Al-Rumhy said.
The delegates are holed up in Abu Dhabi and Sunday has seen the usual barrage of soundbites and headlines from the pow wow.
For his part, Al-Falih (the only voice that really matters besides Novak) insisted he’s not going to “respond to weekly oil market gyrations.” “It’s too early to talk about oil cuts,” he went on to say, adding that “ideally, we don’t like cutting output.” He commented on U.S. production as well, suggesting the market is too focused on those numbers.
Ahead of the ministerial meeting, Novak said Russia is prepared to acquiesce to whatever everybody decides. “Russia sees the global market well-balanced by mid-2019,” he noted, before suggesting that “demand may even exceed supply.” That, despite the technical committee’s assessment that next year will see a global oil surplus if everybody keeps pumping at the current rate.
Ultimately, the confusion is at least partially due to Trump, whose shrill rhetoric over the summer prompted a ramp up in production in order to ensure his “tough on Iran” stance didn’t lead to higher prices at the pump for U.S. consumers. Now, his decision to grant waivers along with surging U.S. production has prices in a veritable death spiral and if he “succeeds” in engineering a global recession with his trade war, demand could evaporate, adding to the malaise.
On the other hand, any move by OPEC and Russia to support prices will likely be met with more angry tweets from the U.S. President, although it’s at least possible that with the midterms out of the way, he won’t push the issue as hard now that he doesn’t have to worry about higher gas prices affecting the vote.