Back in 1973, Saudi Arabia took a very aggressive move against the U.S. by starting the Arab oil embargo:
But the Trump Administration has taken a strong position against Iran, Saudi Arabia’s nemesis. KSA also depends on the U.S. for its protection as well as its economic development. The current relationship between Washington and Riyadh could not be better:
"I love working with him (Trump)." - Crown Prince Mohammed bin Salman, October 5, 2018
Photo Courtesy Of AFP)
Prior to announcing the U.S. pull-out of the Iranian nuclear deal in May, the White House had secured assurances from producers, namely Saudi Arabia, that any disruptions in Iran’s exports would be offset by higher production by countries with spare capacity, according to Treasury Secretary Mnuchin. The Saudi energy minister confirmed it. Continue reading "Saudi Crown Prince Claims Lost Iranian Barrels Will Be Offset"
The Energy Information Administration released its Short-Term Energy Outlook for September, and it shows that OECD oil inventories likely bottomed in July at 2.804 billion barrels. It shows inventories rising in the third quarter, contrary to the usual seasonal trend. However, it forecasts that stocks will drop in December to 2.798 billion after the Iranian sanctions are expected to go into effect.
Throughout 2019, OECD inventories are generally expected to rise, ending the year with 72 million barrels more than at the end of 2017. The anticipated drop in Iranian production, due to the U.S. sanctions, is forecast to be offset by increases from other producers, such as the U.S., Canada and the Gulf states of Saudi Arabia, Kuwait and the UAE.
Saudi Arabia has recently stated that it can produce at least 12 million barrels per day. If it does increase output to that level, this would be a major “surprise” to world markets since its production has never exceeded 11 million. Continue reading "World Oil Supply, Demand And Price Outlook, September 2018"
Major uncertainties loom toward the end of the year when sanctions are currently scheduled to go into effect by the U.S. regarding Iran. The range of potential outcomes is large, as it is possible that a deal may be reached with Iran which avoids sanctions (Iranian President Hassan Rouhani in a speech Sunday did not rule out peace between the U.S. and Iran), or Iran increases its exports to China and India, offsetting decreases to European countries. But the base case should assume some loss, on the order of 600,000 b/d.
President Trump has a few policy options to manage the size of the loss:
- Pressuring the Saudis and other Gulf producers to maximize their output
- Granting waivers so that more exports can flow
- Ordering drawdowns of the Strategic Petroleum Reserve, potentially coordinated with the International Energy Agency
But Iran’s production is not the only risk. Venezuela’s production is in a meltdown and production may drop to just one million barrels per day by the end of the year. Whether it could stabilize at that level is an open question and is sure to provide a risk premium to oil futures prices.
I created three scenarios to develop a range of likely global inventory levels and future oil prices. The base case “demand for OPEC crude” is from OPEC’s own July Monthly Oil Market Report. In all three scenarios, I assume production in Venezuela drops to one million barrels per day (mmbd) by 1Q19 and stabilizes there. I also assume that Saudi production rises to 11 mmbd and remains at that level and production increases in the UAE and Kuwait. Continue reading "Oil Market Scenarios And Risks: 4Q18"
OPEC concluded its meeting on June 22nd with a vaguely-worded communique about its oil deal:
“Accordingly, the Conference hereby decided that countries will strive to adhere to the overall conformity level of OPEC-12, down to 100%, as of 1 July 2018 for the remaining duration of the above-mentioned resolution and for the JMMC to monitor and report back to the President of the Conference.”
At the press conference afterward, OPEC president HE Suhail Mohamed Al Mazrouei, UAE Minister of Energy and Industry, struggled to explain exactly what it meant. When asked how many barrels would be added, he remarked that “you can do the math” between current output and the 100 percent conformity level, although he later said it was about one million barrels per day.
However, at the press conference of the 4th OPEC and non-OPEC Ministerial Meeting on June 23rd, oil ministers Khalid al-Falih of Saudi Arabia and Alexander Novak of Russia, responded to questions, explaining the new deal and how it would be implemented.
But Iran’s oil minister later said that OPEC’s oil output agreement did not specify a production increase, which probably explains why the agreement was left vague. It also explains Mr. Al-Falih’s unusual remark at the press conference: Continue reading "Oil Price Implications Of OPEC's New Oil Deal"
Fears of potential shortages from the implosion of Venezuela’s production, and the imposition of sanctions on Iran, have catapulted the Brent oil price marker to $80. However, there are great uncertainties about how much oil supplies will be disrupted over the balance of 2018, and what the supply response will be from OPEC and other producers, such as Russia and the United States.
Venezuela’s production fell by 45,000 b/d in April from March, averaging 1.47 million barrels per day. The April decline was equal to the average monthly drop thus far in 2018. Whether the rate of decline will increase, or stay the same, is unknown, but what is known is that oil workers have been leaving the country, unpaid.
The May 20th presidential election has been called a sham. And President Trump is considering sanctioning Venezuela's oil or prohibiting the crude to be sold in the U.S. If he does, Venezuela’s economy is expected to collapse because it is totally dependent on oil revenues. Continue reading "Oil Market Risks For 2018: Upside Then Downside"