Last few weeks as Brent touched $80/bbl, consumers are starting to get genuinely concerned about inflationary pressures building in the US economy. Gasoline prices averaging closer to $3/gallon at the pump with implications for US consumer demand going into the key summer driving season this year. Pressure from US is mounting for OPEC to take their foot off the pedal and let the barrels flow freely. OPEC took 1.2-1.8mln bpd out of the market in 2016, with the intention to balance markets over time as demand catches up with supply. They achieved that goal as their strategy was to buy time effectively. However they got lucky (in 2017) given Venezuela/Iraq’s involuntarily declines have helped tighten the market alot sooner. Now potentially Iran’s 500k bpd is at risk given sanctions to be placed on them but EU/China do not seem to be giving into US pressure, why should they? Either way let’s not fool ourselves, the oil market is NOT tight. It goes through periods of tightness and weakness given the seasonal period we are in. There is a time and price which it needs to get certain types of barrels onto the market. OPEC knows this very well. Saudi Arabia needs $80-$90/bbl. Oil to balance their FX reserves/budget. Their agenda is alot more simple than the market thinks. Russia needs about $60/bbl and is happy with these prices.
When oil was at $45/bbl., it was alot easier to get the members to “agree” to a cut. With Oil closer to $80/bbl, it is a lot harder to maintain that partnership given all members are itching to raise production as they risk losing out on revenues to US/Shale. Deja vu? Today’s events bear similarities to the 1990′s, with the history of OPEC trying to keep an agreement in place when cracks start to appear underneath the surface. Cheating ensues. Hmmm, has it already started slowly? After all OPEC really is more about Saudi Arabia and Russia these days then it is about the little guys. Talks of Saudi Arabia/Russia making up for any loss of Iranian barrels in the market, call me a cynic, but it seems highly convenient for them to make this gesture in aiding the market but keeping the original “agreement” in place. Do we even need to discuss the elephant in the room, Aramco IPO?
According to last week’s CFTC reports, Hedge Funds and speculators reduced their net long WTI/Brent bets by 101 million barrels last week, as nervousness grew that Oil price was getting a bit ahead of itself. However positions are still quite long currently. The longer Oil prices average $75/bbl plus, more expensive projects come into play. Demand is strong, no doubt. But so is supply. Commodities are all about market balance and the price at which that balance is achieved. For now, Oil prices seem capped at best with risk going into the key OPEC meeting on 22nd June that members start to cheat. This has always been the case; what they say and what they do are two entirely different scenarios, which is why one should not bother reading the press headlines as perhaps a more fruitful and dare i say it intellectually stimulating use of one’s time would be to watch paint dry. Over the weekend, there was the unofficial meeting with Saudi Arabia and other producers (Russia was not present), where they stressed the need to stimulate adequate investments to ensure stable oil supply (yawwwnnn…). Talking their own book?
Let the games begin……stay tuned……