Is Time On OPEC’s Side To ‘Save’ The Oil Market?
Saudi Arabia is apparently determined not to let oil prices crash again like last year.
But with more than half of the peak summer driving period in the U.S. over, does the Kingdom and the enlarged OPEC group under its influence have time on their side to turn the market around before the year ends?
Aside from better Chinese economic data, crude prices were boosted on Thursday by a Bloomberg report quoting an unidentified Saudi official as saying the country would not tolerate the steep price slide of the past week. The official added that the Saudis were open to all options to halt further declines.
As a result, the and crude benchmarks both rose more than 2% each to crawl out of seven-month lows, marking their first meaningful rebound in four days. Still, in Friday’s early European session WTI remained down nearly 6% on the week. Brent showed a week-to-date decline of 7%.
Scarce Options For Saudi Arabia
And despite Saudi Arabia’s resolve to fix the market, Bloomberg noted in an analysis that the options before Riyadh were scarce:
“A cooling global economy and the U.S-China trade dispute are putting a brake on fuel demand, so even if global producers decide to cut output further, they may struggle to revive prices.”
The Saudi plan really is quite simple: Put a further squeeze on the 1.2 million barrels per day of production cuts that OPEC has already committed to through March 2020.
As OPEC’s biggest producer, the Mideast country plans to keep its own exports at below 7 million bpd from next month. In good times, the Kingdom can produce up to 10.3 million bpd, and now certainly isn’t one of those times. To achieve the lower exports, Riyadh’s state-run Saudi Arabian Oil Co., known as Aramco, will cut customer allocations across all regions by a total of 700,000 barrels a day in September.
For North American customers, the Kingdom will send about 300,000 barrels bpd less than they nominated for oil scheduled to load in September. Reductions to European buyers will be larger and there will also be modest cuts to Asian buyers, although no details are available as yet.
U.S. Crude Stockpile Numbers Will Be Key
Of these numbers, the most important will be those for the U.S. market, where data on oil production, consumption and balances are more transparent than anywhere in the world, and updated weekly.
Saudi Arabia has done an excellent job of throttling their exports to the U.S. in the past, evidenced by WTI’s more-than-35% price jump in the first four months of this year, after plentiful supplies earlier left the market with a compounded loss of nearly 45% in the last three months of 2018.
While WTI’s gains have been erratic since the start of this summer, OPEC production cuts have still managed to put a floor under prices. Strong demand for oil this summer has also been a major help. For seven straight weeks through July, fell by nearly 50 million barrels in total, a staggering drawdown by any measure.
Last week, that drawdown trend appeared to come to an end, with the first rise in U.S. crude stockpiles since mid-June.
Yet, it’s too early to tell if the 2.4-million barrel stockpile rise for the week ended August 2 will be the start of a trend in itself.
Just A Few Weeks Left To Peak Summer Driving Period
What’s known, however, is that there are less than four weeks left to the peak summer driving period in the U.S., with the Sept 2 Labor Day holiday marking an official end to the season even before the weather turns colder.
Last summer, strong crude drawdowns continued through mid-September, before 11 continuous weeks of inventory builds into the end-November that hammered WTI prices down by more than 30%. But that stretch of stockpile builds also came on the back of another dynamic: President Donald Trump’s decision to grant sanction waivers to importers of Iranian oil. Once OPEC got its cutting-act together in December, the market steadily began to recover.
This time around, if enhanced cuts by the Saudis become visible at the end of September, they may again help to put a floor under the market.
But there’s also a huge wildcard this time that complicates matters for OPEC: the U.S.-China trade war.
Mountain Of Trade War Headwinds Looming
With Beijing’s yuan devaluation from last week appearing to be just the tip of the mountain of likely shocks awaiting the global economy, there’s no certainty that OPEC can just slash its way to desired prices, though there are few other options for the group.
And the “OPEC put” for higher prices – i.e. reduced exports to the U.S. – may be offset by China’s plans to dramatically cut its purchase of U.S. crude over the coming weeks, as reported by CNBC. If true, this will cause U.S. crude inventories to swell again each week, pressuring WTI lower. Last week was a whopping example of what a drop in U.S. crude exports could do to stockpiles: A 710,000 barrel decline from the previous week’s exports contributed largely to the 2.4 million barrel inventory build.
What will certainly help OPEC is a slump in overall U.S. crude production.
But in a cruel twist of fate, lower prices may be needed to bring about a meaningful drop in that U.S. output cranked out by shale oil drillers across the country.
Ellen Wald, president of Transversal Consulting and Investing.com contributor, explained this logic :
“As long as oil prices don’t dip into the $40s, shale oil companies should be able to continue to drill and to expand drilling operations. It helps that more pipeline capacity is coming online in 2019, and these companies have drilled-but-uncompleted wells (DUCs) that can be cheaply and easily put into production.”