Color me skeptical about Saudi Arabia’s commitment to an OPEC production cut sizable enough to satisfy markets.
As I’m sure came through in our initial Thursday take on today’s meeting in Vienna, I’ve had about all I can take of this farce.
Obviously, Riyadh is feeling the pressure from Donald Trump and at this point, I don’t know how it could possibly be any clearer that the U.S. President’s support for Crown Prince Mohammed amid the international outcry surrounding the grisly murder and subsequent dismemberment of Washington Post columnist Jamal Khashoggi is influencing the Saudis’ decision calculus on oil production.
Earlier on Thursday, Al-Falih told reporters that he hasn’t had any discussions with the U.S. on oil price levels and that Riyadh “has not been asked to refrain from a substantial cut.” That’s obviously a lie, because Donald Trump quite literally asked just that on Twitter 24 hours ago.
Further, Al-Falih has to know that the market is looking for something more convincing than a 1m b/d cut and even if he’s inclined to believe that 1m b/d is “adequate” (as he put it on Thursday), there’s no way he thinks that’s going to be sufficient to definitively put a stop to downward pressure on prices.
It thus comes as no surprise that Thursday’s meeting was inconclusive and that the proverbial can has been kicked to Friday. The Saudis are reportedly angling for Russia to shoulder a larger percentage of the burden than Moscow wants to shoulder which, again, appears to suggest that Al-Falih is looking to give Riyadh some plausible deniability in the event Trump takes a look at the numbers and wants to know who’s throttling back and by how much.
Either that, or Al-Falih is actually angling to undercut this entire process on the way to killing two birds with one stone (i.e., he can just blame the Russians for being obstinate and Riyadh can tell Trump that, consistent with his Wednesday tweet, “OPEC will be keeping oil flows as is”).
If you believe what the Saudis are saying, the idea is to come to an agreement on a 1m b/d cut (which would just barely meet market expectations anyway) and apparently, everyone will reconvene on Friday and try again.
“Not everybody is ready to cut equally,” Al-Falih told reporters in Vienna, adding that “Russia is not ready for a substantial cut.”
Crude held losses on the news for obvious reasons.
This is yet another day of 3%+ losses for oil and it was (much) worse earlier in the day.
If you’re an OPEC member other than Saudi Arabia, you’re probably wondering why you’re even participating in this anymore. This is obviously up to Donald Trump, Vladimir Putin and Mohammed Bin Salman and everybody else has been relegated to stage props. They might as well just make cardboard cutouts of the other delegates and ministers and arrange them around the room. No wonder Qatar is quitting.
Additionally, Saudi Arabia is chopping off its nose (with a bone saw) to spite its face. Bin Salman has a long list of domestic priorities he wants to fund and he also wants to justify the ~$456 quadrillion price tag he tried to assign to Saudi Aramco for that IPO that’s never going to happen. Now, he’s letting Donald Trump jeopardize that in the apparent interest of covering up the bungled assassination of a journalist in the back of the Kingdom’s Istanbul consulate.
This whole thing is absurd – stone, cold absurd.
And we haven’t seen the end of it either – we’re all going to be subjected to another round of these headlines tomorrow.
Oh, and we also learned today that as of last week, the U.S. is officially an oil exporting country for the first time in seven decades
On that note, we’ll leave you with an excerpt from a BofAML note we highlighted “way” back on November 11:
The bigger question is how OPEC+ will factor in the US shale phenomenon this time around. After all, America used to spend 3% of GDP buying foreign energy in 2008 but it just became a net energy exporter thanks to surging domestic output. Whether measured in BTUs/oil barrels equivalent or in US dollars, we estimate that the reversal in energy balances from a deficit into a surplus likely occurred in October 2018. With oil prices falling by 20% from the highs in recent weeks, the next OPEC+ decision will have to factor in: (1) the massive 2+mn b/d YoY surge in US output and (2) the negative demand impact of the ongoing trade tensions.