By Barani Krishnan
Investing.com - Saudi Oil Minister Abdulaziz bin Salman spoke at length about supply and demand in trying to explain OPEC+’s decision this week to raise production. In the end, his U-turn from an almost definite extension of output cuts was partly due to something else he was at ill to discuss: Iran.
The “elephant in the room” no one really wished to talk about, yet couldn’t ignore. That was Iran at Thursday’s meeting of the world oil producing alliance. It’s a position Tehran has gotten used to after more than two years of U.S. sanctions on its oil despite being a founding member of OPEC, or the Organization of the Petroleum Exporting Countries.
It’s also a position that’s become increasingly untenable under President Joe Biden and his indifference to the sanctions imposed by his predecessor Donald Trump. Since coming to office in January, Biden has performed little more than lip service to Trump’s sanctions, allowing Iran - which once exported some of its oil secretly - to ramp up shipments now, almost entirely to China.
Saudi Arabia’s position in the Iran affair is just as farcical. Despite being OPEC’s de facto head, the kingdom had not a word of objection to Trump ostracizing Iran within the same organization it helped found. Now, with Tehran’s exit from the situation looking imminent, Riyadh remains reticent, though it has been preparing for such an eventuality since Biden’s election win in November.
As Oil Minister Abdulaziz answered reporters’ questions via streaming webcam on Thursday, Iran held a virtual meeting of its own with China, Russia, France, Germany and Britain. At Tehran’s desire, no U.S. representative was on the call, although the aim of the meeting was to determine the steps for restoring Iran’s 2015 nuclear agreement with world powers, including the United States, and removing the Trump sanctions. The talks will move to in-person discussions in Vienna next week, which again the United States will not attend but try to guide remotely.
The negotiators believe they can have in two months a deal that will stop Iran from advancing toward a nuclear bomb. But the talks can also drag. The estranged Iran-U.S. relationship was already complicated, before Tehran came up with the demand that all sanctions against it be dropped to stop the progress of its nuclear program. Washington, of course, wants the exact opposite to happen before a deal can be done.
Any standoff in the talks will benefit the Saudis, who conceivably have the most at stake from Iran’s legitimate return to the oil market. Light and heavy crude oils are Iran’s primary export grades and many of its customers went Saudi Arabia’s way with Trump’s sanctions. The longer the Iranians are prevented from putting barrels back on the market, the more time the Saudis have in adjusting their crude exports to supply-demand in the era of Covid-19 uncertainty.
As of Thursday though, OPEC+ decided - for better or worse - that it was raising its production, regardless whether the Saudis were ready for it.
After one year of output cuts, the 23-member OPEC+ - comprising the original 13 members of the Saudi-led OPEC and 10 other oil producing nations steered by Russia - will pump an additional 350,000 barrels per day in May and June, and a further 400,000 daily in July.
Abdulaziz initially tried to persuade the alliance not to raise production. He cited continued dark clouds from Covid-19, particularly the risk to oil consumption in Europe, where France has instituted a month-long lockdown. As the one that contributes the lion’s share to all OPEC cuts, the Saudis typically have the final say on production.
And while Abdulaziz didn’t harp on it, the recent volatility in oil prices was on everyone’s mind at OPEC+. U.S. crude and global oil benchmark Brent lost up to 7% a day at times over the past two weeks, despite OPEC+ continuing to keep at least 7 million barrels daily off the market.
Despite these negatives, the majority in the alliance wanted a production hike, believing that summer demand for oil will be many times higher than the Saudis estimated. Russia, the other big voice in OPEC+, also desperately needed to feed its growing domestic demand for gasoline, diesel and jet fuel expanding at a faster pace than anywhere else in Europe.
And so, there it was, the demand theme, which seemed to overwhelm fears of a third European Covid wave. The optimism was enough for Goldman Sachs to project $80 Brent by the third quarter, nearly 25% above Thursday’s close. The Wall Street bank made its call based on OPEC+’s estimate that demand growth over the next three months will be 3.0 million barrels versus a supply expansion of 1.0 million (Author’s note: Goldman, as well as OPEC and its allies, have overestimated demand at times).
Many in OPEC+, including the Saudis, were also getting anxious about U.S. crude exports which had been ramping lately. The general assumption had been that the pandemic and Biden’s green energy policy will suppress any growth in America's fossil fuels. But to the surprise of many, U.S. crude exports jumped last week to 3.2 million barrels per day, breaking out from their 2.5 million norm.
U.S. oil production itself hit 11.1 million barrels daily last week - above the 11 million norm -- suggesting that American drillers were responding positively to crude prices at $60 per barrel or more.
And more supply could be coming, based on the rising U.S. oil rig count. As of Thursday, the rig count, which is a measure of future production, stood at 337, nearly double from its August record low of 172. While that’s less than half of the pre-pandemic rig count of 683, the “Drill, baby, drill” phrase associated with the prolific U.S. shale oil industry isn’t “gone forever”, as Abdulaziz triumphantly declared a month back. Not yet at least.
But more than all this were Saudi Arabia’s unspoken concerns about Iran - the gnawing-feeling that the longer it held itself and its allies from a production hike, the more market share its archrival could poach.
Energy research company Kpler estimated that last month alone, Iran exported 478,000 barrels daily on the average to China, and this should increase to 1 million in March. Some analysts believe that once sanctions are removed, Iran can reach within months its previous peak production of nearly 4.0 million barrels per day, from its current 2 million plus.
Once it's back on the market legitimately, Tehran could also quickly win customers for its oil by doubling down on the discounts it’s been offering Chinese refiners. According to reports, Iranian barrels in the cash market were being offered at $3 to $5 discount to Brent.
While the quality and prompt shipment of Saudi crude has always won the kingdom customers, Iran’s grades and supplies were competent, particularly for customers seeking a bargain and who did not mind blending to achieve the results they wanted. Unless its competitors moved quickly to lock up new demand and customers for the summer, an aggressive Iran could force a repricing of the cash market.
Abdulaziz acknowledged on Thursday the weight Iran still had in the market, when replying to a reporter’s question on how OPEC will manage a Tehran free of sanctions. “Once Iran returns to 2016 output,” he said, referring to the Islamic Republic’s production before the start of the Trump presidency, “we may remove the limit” on OPEC production.
It shows the Saudis are thinking more about their rival that they care to admit.
Oil Price Roundup
New York-traded West Texas Intermediate, the benchmark for U.S. crude, did a final trade of $61.30 before the Good Friday holiday and weekend. It settled Thursday’s session at $61.45, up $2.29, or 3.8%. For the week, WTI was only slightly higher, rising 48 cents, or 0.8%.
London-traded Brent, the global benchmark for oil, did a final trade of $64.67 per barrel before Good Friday and the weekend. It settled Thursday’s session at $64.86, up $2.12, or 2.1%. For the week Brent gained 45 cents, or nearly 0.5%.
Gold Market Brief & Price Roundup
Gold brushed highs of just above $1,730 an ounce on Thursday as U.S. Treasury yields and the dollar continued their retreat from recent highs.
The rally for a second straight day helped gold rebound from its wrecking losses in two earlier sessions that dealt a severe setback to longs eyeing a return to $1,800 pricing.
Benchmark gold futures on New York’s Comex did a final trade of $1,730.45 an ounce before the weekend. On Thursday, ahead of the Good Friday holiday, it settled up $12.80, or 0.8%, at $1,728.40 an ounce, after a session high at $1,731.05.
Together with Wednesday’s rebound of 1.8%, Comex gold virtually recovered all it lost in the first two sessions of the week that hurtled the market to the $1,600 territory it had not visited since March 12. For the week, Comex gold was down just 0.2%.
The spot price of gold settled flat at $1,729.57, catching up with its lag to the futures market in recent days. Moves in spot gold are integral to fund managers who sometimes rely more on it than futures for direction.
The Dollar Index, which pits the greenback against six major currencies, slipped below the key bullish level of 93. Yields on the U.S. 10-year Treasury note also retreated to 1.68% from the week’s highs of 1.77%.
“Gold has a bottom in place,” said Ed Moya, U.S. markets analyst at online broker OANDA. “When the weaker dollar trade returns, this will likely coincide with a string of surging pricing pressures in the U.S. The consensus on Wall Street is still that inflation won’t materialize, but the risks are growing that it could.”
But Moya’s comment came before the blockbuster U.S. jobs report for March released on the Good Friday holiday. That report showed a growth of 916,000 jobs in March, way above the 660,000 forecast by economists. The huge beat on jobs could again send the dollar and yields spiking on Monday.
Gold had one of its best runs ever in mid 2020 when it rose from March lows of under $1,500 to reach a record high of nearly $2,100 by August, responding to inflationary concerns sparked by the first U.S. fiscal relief of $3 trillion approved for the coronavirus pandemic.
Breakthroughs in vaccine development since November, along with optimism of economic recovery, forced gold to close 2020 trading at just below $1,900.
Since the start of this year, the rut in the yellow metal has worsened despite the Biden administration issuing another Covid-19 relief of $1.9 trillion. The White House revealed on Wednesday a separate infrastructure spending plan for $2 trillion.
In spite of the dollar debasement expected from these relief measures, the greenback has rallied so far at the expense of gold, which strayed near bear market territory at least twice this month when it lost 20% from its August record highs.
Both the dollar and bond yields have surged this year on the argument that U.S. economic recovery from the pandemic could exceed expectations, leading to fears of spiralling inflation as the Federal Reserve insists on keeping interest rates at near zero.
Energy Markets Calendar Ahead
Monday, April 5
Private Cushing stockpile estimates
Tuesday, April 6
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, April 7
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, April 8
EIA weekly report on {{ecl-386||natural gas storage}
Friday, April 9
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.