Oil, trends and the ‘market whisperers’

The OPEC meeting in Vienna on May 25 concluded with no surprise. As anticipated, the OPEC and non-OPEC oil ministers have agreed to extend the 1.8 million barrel-per-day (bpd) production cuts. The main unknown issue was rather related to the term than to the decision itself. Anyhow, the cuts are extended for the next nine months, in order to avoid the seasonal ups and downs in summer and January respectively. The monitoring committee will meet every two months to check on the evolutions and submit recommendations for the next OPEC summit in November.
The agreement was described by the Saudi Energy Minister, Khalid Al-Falih, as historic. Although it wasn’t a surprise, it has the merit of contributing to the markets steadiness. It brings stability and predictability to the markets. As one commentator said, a failure to renew the agreement would have sent the markets into turmoil – and that’s what most probably would have happened.
Saudi Arabia and international experts anticipate higher demand as the summer season begins in the northern hemisphere, in the US and Europe. In the US, gasoline demand was expected to increase since the end of May, when the season begins and, given the growing economy, as well as cheap fuels, would stimulate people to hit the roads for holidays. Hence, the American Automobile Association projected 34.6 million people will drive 80 km or more from home during the holiday period, the most since 37.3 million in 2005. Higher oil demand is expected also in the Gulf countries.
Anyway, the markets were not impressed and the oil price tumbled by 5 percent on the Asian markets, to recover lately to around USD 52 per barrel. As some analysts point out, the markets wanted to see more coming from the OPEC summit – and when the deal was confirmed the oil price fell. On the other hand, those expecting a more balanced international market, dreaming of USD 60 or even USD 90 per barrel will have to wait a little bit more. OPEC, IEA and EIA, all three of them, considering the output cuts and the long-awaited demand in growth of an additional 1.3 million bpd, say the market will get balanced in the second half of the year. There’s a saying going around – this is a marathon, not a sprint, so don’t expect oil prices to surge overnight.
At the end of the summit, Russia’s Energy Minister Alexander Novak said that OPEC and non-OPEC producers will continue to build on the framework of cooperation as a sign of good intentions for a long-term deal. Nevertheless, some of the oil exporting countries officials wondered if Russia will keep the course for the nine-month period. Although the cut for Russia is of only 300,000 bpd (about half of the non-OPEC countries output), a negligible level in comparison with Russia’s overall production of 10 million bpd, not all OPEC participants are optimistic in terms of meeting the deal. Others feel Moscow has no other option but to stick to the agreement.
And yet, it’s not Moscow the main threat to the oil price right now. As usually in the latest years, for the supporters of higher oil prices there’s the threat coming from the US shale oil producers. But OPEC’s largest producer, Saudi Arabia, is rather optimistic in this regard. “Shale is an important variable but we don’t believe it’s going to significantly derail or affect what we’re doing. The market is big enough to absorb the expected increased production in shale in 2017,” the Saudi Energy Minister said after the meeting. An opinion hardly shared by the OPEC partners and in disagreement with most market analysts, which say that price gains would lead to rapid growth in shale oil production and consequently to another downturn in price. The US shale producers surfaced when the oil price rose, although shale is relatively expensive to produce. The shale producers more than doubled their productivity over the last few years, but they face limits in terms of quantity and speed regarding what the Permian Basin can offer. However, the US officials forecast a production up by 1 million bpd by December, which would offset about half of the OPEC cuts.
But there’s another threat to the price of oil. US President Donald Trump has proposed the sale of half the country’s strategic oil reserves, even as OPEC and its allies cut the output. The plan was released just a day after President Trump left Saudi Arabia, part of his first tour of visits abroad! According to the plan, the US would sell half of the strategic reserves from October 2018, during a ten-year interval, to raise USD 16.5 billion. President Trump’s budget calls for selling an additional 270 million barrels of oil over the next decade. The plan also envisages opening up more production in Alaska.
Looking at the initiative, it might not be catastrophic news for OPEC, as the sell is to be scheduled for a ten-year period. According to analysts this means about 95,000 bpd and the sales will start in 2018. And yet... it gives the signal there’s a ‘market whisperer’ around. After all, by announcing the plan within hours after leaving Saudi Arabia, the US President made it clear – analysts say – the US has no intention to help the Middle East allies (in spite of the huge weapons contracts signed in Riyadh during the visit) when it comes to balancing the crude oil market, but to work against this goal.
The proposal could drop the US crude reserves below 300 million barrels by 2025, down from 688 million barrels today. The petroleum reserve stores oil at four underground sites in Texas and Louisiana. It guards against disruptions in the flow of oil from the Middle East and other countries. It was created in the wake of the 1970s Arab oil embargo. However, the developments during the past years, especially regarding the shale oil, have turned the US into one of the world’s largest producers and debates are ongoing if the reserve is still necessary.
The news about President Trump’s proposal might have given shivers to the OPEC countries. Anyway, it’s not good news for the cartel aiming at a more balanced international oil market. If approved, it could lead to a medium-term stalling oil market, which is mostly uncomfortable for the exporting countries, already facing domestic problems due to the low oil prices. Canada itself sees trouble ahead. In a recent comment, an analyst pointed to the fact that “most of the crude oil in the Strategic Petroleum Reserves (SPR) is the lighter, sweeter variety, which is similar to American imports from OPEC but also to the growing American output of shale oil. American refineries, however, are mostly designed to process heavier types of crude oil.” Such oil is found in Canada and, if the US decides to flood the light oil market, the refineries will also need heavy crude oil.
But President Trump’s proposal might face trouble ahead and his adversaries see salvation possible. In order to be implemented, the proposal involves the amendment of the law on the Strategic Petroleum Reserves pointing to a minimum of 450 million barrels. Most of all, the issue has to be passed by the Congress after the debates which started at the end of May. There are already disputes on the topic. Some Republicans support the move, claiming the world has changed a lot in the last decade and the US have become one of the largest oil producers. Democrats are not so convinced, one senator said “we are not going to let Donald Trump auction off our energy security to the highest bidder.” Other representative added that “the SPR exists to keep energy available and affordable in times of crisis or natural disaster, which helps low-income communities most,” adding that selling the reserve “to pay for tax cuts for the extremely rich is especially cruel,” calling the plan a “short-sighted favour to oil billionaires.”
The supporters claim now there are other sources of increased oil production from fracking and other drilling techniques and that the sales would not affect the world market because they are to be scheduled during a ten-year period. But analysts are reluctant – selling the reserves could lead to price problems if disruption appears in one of the large oil exporting countries. They underline the fact that the sale would face huge problems in the Congress, “it would be a heavy lift.”
It might take some time to see the proposal sorted out. US President Trump wants to play big when it comes to oil too. The international oil market will be the victim or the winner, depending on which ‘market whisperer’ takes the lead.

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