The state of the oil market stole the headlines again this week after the US President announced his intention to rigorously enforce sanctions against Iran and stop all waivers.
The market reacted swiftly to the high side but lost a lot of momentum on the back of a second Presidential announcement, as we closed the week.
In Friday trading, Brent crude was priced just above US$72 with WTI around US$63 a barrel.
Matter of hours
The oil price lost 3 percent in a matter of hours after a report that the American President called OPEC.
CNBC and other news outlets reported that President Trump told reporters on Friday that he “called up OPEC. I said, You’ve got to bring them down. You’ve got to bring them down, and gasoline’s coming down.”
There’s no detail about who he talked to and what was promised, but the President has decided that OPEC has to deliver the solution; and as if my magic, the price drops.
The waivers to continue to import Iranian oil, that were granted by the US government to several countries, including India, China, Korea, Turkey and Japan come to a close on May 2.
While some countries have cut back, the International Energy Agency said that these countries have already been importing more Iranian barrels that they should.
There’s no detail of how the US will monitor the withdrawal of Iranian barrels, but President Trump delivered harsh words for anyone even thinking of not complying.
The President has also decided that Saudi Arabi and the UAE will fill the gap as Iran is currently still exporting about a million barrels of oil a day.
The amount needed in the market from key OPEC members already committed to production cuts until June would all but negate the OPEC agreement.
Declaration of Cooeration
OPEC members plus many non-OPEC players including Russia, signed the Declaration of Cooperation in 2016 in an effort to balance the market and keep prices steady.
Saudi Arabia has been cutting back more than its quota in recent months, so it has a spare 500,000 barrels of oil it could quickly return to the market.
By doing so, it would not breach the OPEC plus agreement, but it might still strain relations within the organization.
The Saudi Arabia energy minister, Khalid al Falih said he would carefully monitor the market and consult with other producers, but he was careful to make no commitment.
He said that Saudi Arabia would stay with the OPEC agreement for now, adding that he felt there would be “an uptick in real demand but certainly we are not going to be pre-emptive and increase production.”
He hinted there might be “some level of production management beyond June,” but he made it clear that no immediate action was necessary.
OPEC’s ministerial monitoring committee meets in Saudi Arabia mid-May, so there’ll be plenty of opportunity to update the data and examine the state of the market before the formal meeting at the end of June.
Other geopolitical events taking oil off the market continue in Libya and in Venezuela.
If the US sanctions continue against Venezuela, this will tighten supply further. Some Russian oil was removed late this week after pipeline imports were found to be contaminated.
Poland and Germany stopped imports because of this disruption in the Druzhba pipeline. This is only a temporary incident, but any slight sign of tightening spooks this delicate oil market.
Capital Economics took time to revise its year-end oil price forecast and said while the oil price may be up around 40 percent this year, they believe, “this year’s rise in oil prices will soon go into reverse.”
The best case scenario will be around US$60 a barrel, up from the last estimate, but substantially lower than where we are today.
The main factors weighing on the price will be, “sluggish global growth weighs on oil demand, US shale output grows strongly and investor aversion to risk assets like commodities increases.”
First quarter results are coming in and 2019 has so far been kind to the international oil companies. Any further tightening in the market can still drive prices higher, but the real worry will be global spare capacity; the cushion that helps maintain a sense of stability in the longer term.