With President Trump actively interested in U.S and Iranian production, President Putin in Russian production, and Crown Prince Mohammad Bin Salman (acting on behalf of his father King Salman) in Saudi production, these three leaders are shaping over 40 percent of global crude oil supply. Oil prices should remain soft unless or until there is a new supply disruption or the OPEC producers, who have recently cranked up production, dial back. Alternatively, fewer waivers may be granted in 6 months or Russia might cutback output growth. There is a broad range of possible outcomes, even as all parties claim diplomatic collaboration. This much head of state interest in crude oil markets will muddy the waters for supply and prices in the months ahead.
This weekend the Joint Ministerial Monitoring Committee (JMMC) will meet in preparation for the OPEC Ministerial meeting in early December. Mindful of impressive non-OPEC supply growth, the Iranian waivers and falling crude prices, OPEC will consider cutting production from today’s highs. Recall, President Trump encouraged OPEC (especially Saudi Arabia)
producers to lift production in concert with the re-imposition of sanctions on Iran. The possible shift in OPEC production strategy is due not only to weakening fundamentals, but also to President Trump’s jump into the oil markets. The granting of waivers to eight Iranian oil importers and that they will be reviewed every 6 months, means Mr. Trump now effectively controls Iranian production. Indeed, the press briefing on November 7th of Mr. Trump’s Special Representative for Iran, Brian Hook, is striking, “So during this period, while we have taken off a million barrels, we have not lifted the price of oil. And that is not by accident; it is through very careful and calibrated diplomacy led by the Secretary and the President.” The Administration also seems keen on influencing crude oil prices.
What do the Heads of State Want?
So now in addition to Russian President, Vladimir Putin, and Saudi Crown Prince, Mohammad Bin Salman, there is U.S. President Donald Trump conducting oil market analysis and shaping production strategy. What do they all want, in terms of price? President Trump wants prices weak enough to temper domestic gasoline prices and weaken Iran without weakening his own shale producers. This probably means less than $80 (Brent), but maybe not less than $65 to $70. President Putin wants to benefit from a rise in market share, as Russian exports replace some Iranian oil, but also wants prices strong enough to boost his export tax revenues. This probably means a number closer to $80 Brent. Crown Prince Mohammad Bin Salman seems to still want prices high enough to fund reforms as well as military spending (perhaps a minimum of $75). The side benefits to Iran and U.S. shale of stronger prices do not seem to be concerns at this point. The rest of OPEC likely just wants to stop the current slide in prices.
What is the Market Looking For?
As we have pointed out over the last several months, the tremendous growth in non-OPEC supply is reducing the demand for OPEC crude oil. As shown in the latest comparison of the crude oil and global oil balances below, both point to a drop in demand for OPEC crude to about 31.4 million b/d. With Iran producing 2.7 million b/d, the rest of OPEC can produce only about 28.7 million b/d in 2019. In October, the “others” produced about 29.5 million b/d. So, at a minimum, the rest of OPEC would cut 800,000 b/d to balance the market and avoid a stock build, all other things held equal. Russia would also need to stop increasing production or even participate in a cut.
After the JMMC meeting in September, many oil market observers oddly exclaimed a major oil shortage was ahead. The fundamentals, however, never supported that view. It was the uncertainty regarding Iranian exports (and possibly other disruptions) rather than the fundamentals that provided upside price risk. With more clarity on Iran, it seems some of the upside price risk is gone, but perhaps for only six months. Oil prices will remain soft unless or until, there is a new supply disruption or the OPEC producers, who have recently cranked up production, dial back a bit. There is also the possibility of fewer waivers in 6 months, however, so any OPEC action should be measured.