Well, TD’s commodities strategists have seen enough out of crude.
Headed into October, it looked like oil might have a date with triple digits thanks to a confluence of factors, not the least of which was the prospect of lost Iranian barrels.
Since pulling the U.S. out of the Iran nuclear deal, the Trump administration continually insisted that allies would be expected to cut their imports of Iranian crude to zero by November or risk running afoul of U.S. sanctions. That hardline stance embedded a geopolitical risk premium in crude and despite efforts on Saudi Arabia’s part to allay fears of a supply shortage, market participants fretted over the prospect that any such efforts would lead to spare capacity constraints, leaving Riyadh unable to respond to any unforeseen disruptions.
Through it all, Donald Trump pushed for more pledges from the Saudis and he (Trump) was successful in setting the agenda for the June OPEC meeting. That was no small feat, especially considering how irritated Iran was at the idea that OPEC was beholden to Trump’s Twitter account.
Fast forward to November and between the equity rout, concerns about the effect of the trade war on the global economy, surging U.S. production and Trump’s somewhat unexpected decision to grant Iran sanctions waivers to eight nations, crude abruptly plunged into a bear market, prompting OPEC+ to reverse course over the weekend. On Sunday, the cartel and allied producers suggested cuts may be in the cards going forward.
That sparked a fleeting rally and Trump was having none of it. “Hopefully, Saudi Arabia and OPEC will not be cutting oil production”, he tweeted on Monday afternoon, adding that “oil prices should be much lower based on supply!”
And just like that, the nascent bounce was squashed. Through Tuesday morning, WTI had fallen for a record 12 consecutive sessions. Both U.S. crude and Brent are down sharply on Tuesday and now sit at their lowest levels since December.
As noted here at the outset, TD has seen enough. “We exit our Brent crude long, despite our conviction guided by strong fundamentals derived from Iranian sanctions, OPEC+ cuts and a return of refinery utilizations”, the bank’s strategists lament, before musing that “it now appears that the US administration has played OPEC like a fiddle.”
Generally speaking, TD expects the market to tighten on the back of OPEC cuts, but for the time being, the outlook is bleak.
“While sparked by an equity market correction, the slump in crude prices towards bear market territory has been exacerbated by a steep rise in OPEC and US shale output [and] the issuance of waivers to key consumers of Iranian crude”, TD recounts, adding that “to make matters worse, global demand concerns have also grown and are serving as an important factor serving as a negative for crude.”
Yes, “global demand concerns”, as flagged explicitly by OPEC itself in their monthly report out Tuesday.
One has to believe that Trump will be inclined to keep the pressure on going forward.
After all, OPEC is “ripping off the world”, ya know?