The meltdown for oil prices came to a halt, at least temporarily, after
Saudi Arabia signaled that the OPEC+ production cuts would be sticking around
for a little while longer.
“We will do what is needed to sustain market stability beyond June. To me,
that means drawing down inventories from their currently elevated levels,”
Saudi energy minister Khalid al-Falih said, according to Arab News.
He said that Saudi Arabia would “do what is needed” to maintain stability.
Oil prices have plunged by more than 13 percent in the last two weeks, a
decline that al-Falih said was “unwarranted.” He added that there was an
“emerging consensus among OPEC+ countries, to continue their work towards
market stability in the second half of the year.”
When asked about the escalating U.S.-China trade war, as well as the
prospect of yet another trade war between the U.S. and Mexico, and the
resulting knock-on effect of a global economic slowdown on oil demand,
al-Falih acknowledged the negative impact. “But you can be sure that we will
be responsive,” he said.
The comments reinforce the likelihood that OPEC+ will roll over the
production cuts when they meet in Vienna in a few weeks, extending the supply
agreement for the rest of the year. The trade war, the cracks in the global
economy, and the questions about demand make the choice a relatively easy
one.
The bearish turn in the market comes even as Saudi Arabia added some
supply in May to offset declines from Iran. According to Bloomberg,
Saudi Arabia added 170,000 bpd in May, while Iran lost 230,000 bpd. Some
smaller increases from Libya and Iraq fully offset the outages in Iran,
helping to explain why the oil market softened in May despite the “maximum
pressure” campaign by the U.S. on Iran. Meanwhile, Russia involuntarily
chipped in a 76,000-bpd
decline, owing to the contamination crisis along the Druzhba pipeline. Related: Tech
Crackdown Creates $120 Billion Bloodbath
However, Saudi Arabia remains below its production limit as part of the
OPEC+ deal, and Riyadh has been much more cautious about pumping more oil
into a weakening market. It was always going to be difficult for Russia,
which is more eager to increase production, to convince Saudi Arabia to
abandon the production cuts after last year’s meltdown. But the latest
nosedive means that the possibility of OPEC+ loosening the cuts has narrowed
substantially.
“While tight fundamentals supported oil prices through mid-May, escalating
trade wars and weaker activity indicators have finally caught up with oil
market sentiment,” Goldman Sachs wrote in a note. The declines over the past
two weeks were likely magnified by technical trading, as speculators had
become overextended. The liquidation of speculative positions probably contributed
to the swiftness of the selloff.
So, where do we go from here? OPEC+ will likely keep the cuts in place,
which may prevent a full-blown glut, heading off a deeper slide. Supply
outages, the prospect of further losses in Venezuela, Iran and Libya also
will mitigate any surplus. Goldman Sachs says that prices “may recover from
here,” although with heightened volatility. The big question now is how
impactful the trade war will be on demand, and more broadly, by how much the
global economy slows. Related: The
Worst-Case Trade War Scenario
The investment bank says that there are three big factors that are
“mispriced developments” in the oil market – “the Permian debottlenecking,
the supply response of low-cost producers and the IMO 2020 shift in bunker
sulfur regulation.” New pipelines and new export capacity along the U.S. Gulf
Coast should “lower the global marginal cost of production,” Goldman analysts
argued. The addition of new U.S. supply, and its integration into the global
market, should narrow the difference between WTI and Brent. Ultimately, that
presents a “multi-year threat to the market share and revenues” of OPEC+
producers. As a result, Goldman sees Brent falling from $72.50 in the second
quarter to $65.50 in the third quarter, and then down to $60 per barrel next
year.
The prospect of higher U.S. shale output and weakening demand from the
trade wars does not bode well for oil prices. In the short run, however, the
OPEC+ production cuts should prevent a much deeper downturn.
By Nick Cunningham of Oilprice.com
