Why an OPEC oil supply surplus will not happen
The outcome of the Iranian sanctions deviations from the Trump administration has set oil stocks on the edge.
While most analysts are optimistic about the OPEC leader Saudi Arabia, which is able to fill the gap as a result of lower Iranian oil exports, reality can be quite different. When we look at the ongoing discussions between OPEC's two key members, Saudi Arabia and the UAE, there is no real sign that the Kingdom of Oil will be willing to increase its overall oil production to keep the prices of the pump in oil-producing countries. [19659002] The real crux of the moment is what the market will do when, on the 2 nd in May, Iran's criminal functions are terminated. History has shown that oil importers are very well equipped to take increasing measures to counteract the impact of Iran's sanctions. Saudi Arabia and others have to be very careful about stabilizing the market without falling into a drum fish trap, which can result in a short-term overload situation.
Today, all signs point to higher oil prices. If no real additional oil enters the market, deficiencies will be visible within months. Statements by US President Trump and US Secretary of State Mike Pompeo that Saudi Arabia and the UAE will add supplies to counteract the loss of Iranian volumes are currently only desirable thinking and not based on any hard promises from Riyadh or Abu Dhabi. [1[ads1]9659002] OPEC's leaders have a strong position to respond to Trump's requirements for additional volumes and lower prices as they wish. Washington's strategy may well have recovered, as US slate will not be able to supply the markets with the necessary crude marks. At the same time, national oil companies are willing to take a back seat, as long as OPEC + production cuts are in place. Related: Sharp Rise In Rig Count Pressure Oil Prices
For Saudi Arabia, no additional production increases are required. The current price and production level is sufficient to support the ongoing economic diversification plans, and stabilizes the position of Crown Prince Mohammed bin Salman. The oil market's stability has also generated enough positive feeling in the market that NOCs such as Aramco are able to enter the international bond market with weapons. Low-cost financing is an attractive tool for Saudi Arabia and the UAE to boost their economies in the short term.
Western analysts still address the loss of Iranian volumes in light of OPEC's savings production capacity. However, this is not a major concern, as the market is well supplied over the next few months. There is no real necessity to force Saudi Arabia and the UAE to open up their cranes to flood the market. Current crude oil prices are also not at levels that really destroy global economic growth. Saudi Arabia and the UAE can easily add around 1.5-2 million bpd in the market, but looking at the irrational emotional behavior of the oil market today, a Saudi production increase may lead to price declines or worse. The OPEC + cut agreement is up for assessment in June 2019, and no move should be expected before then.
Another big problem is already over the market. Oil importing countries, such as China or India, will spend the next few weeks negotiating new oil contracts with Iran. These volumes could partially destabilize the market if other OPEC producers fall into the trap of increasing production to push Iran out of the market. The most sensible approach would be a further tightening of the market, which resulted in a move from the continued elevated global storage, but without creating a shortage.
The Iranian sanction situation will not change Riyadh's current position. The only unknowns at present are the impact of Libyan and Venezuelan supply failure. A potential loss of Libyan crude volumes may change OPEC's overall strategy in the short term. The Venezuelan production decline has already been priced by most parties.
Riyadh will also look at developments in Russia. Although Russia is part of the OPEC + agreement, it seems to be reluctant to maintain production cuts in Moscow. Russia and Saudi Arabia will have to consider their approach as US shale production can jump higher when prices rise too much. Moscow and Riyadh have to deal with an ever-tight market, especially during the US driving season, while trying to keep prices at bay.
Related: Reuters: OPEC's oil production falls to the lowest since 2015
Regardless, tight markets are much more important to OPEC + than a happy Trump Administration is. Price levels between $ 70-80 per barrel will not dramatically cut economic growth, while coupons by OPEC members will be filled. Trump's tweets like that on Friday are likely to fall on deaf ears.
OPEC could also, without official end, reduce production, delivering more volumes to the market to keep prices within certain limits. Saudi Arabia, for example, could increase production by another 500,000 bps without going over its OPEC-imposed quota. If OPEC members and Russia are able to limit their own eagerness to take over Iran's market share, the market will remain stable. No news should be expected before the June meeting in Vienna, not even during the OPEC + ministerial meeting on May 19 th . Trump will soon find a way to explain to his voters why he can't chase gasoline prices.
By Cyril Widdershoven for Oilprice.com
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