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With Iranian sanction waivers coming to an end, oil traders must
quickly adjust to the new market conditions. There is still
optimism that at some point, maybe later this year, Saudi Arabia
and other OPEC members might start filling the gap by increasing
their output. But comments recently made by officials of Saudi
Arabia and the UAE suggest that the cartel is not willing to take
any action that would push oil prices significantly lower. Brent
has dropped since last week, returning once again to levels close
to but still above USD 70 per barrel early on Monday morning (UK
Time). But this fall only came after US President Trump urged
greater OPEC output to replace Iranian barrels. Saudi Arabia's
energy minister commented that there is no need to raise oil output
immediately, as "inventories are actually continuing to rise
despite what is happening in Venezuela and despite the tightening
of sanctions on Iran". He also noted that his country's oil
production in May is set to remain pretty much the same as the last
couple of months.
As recent data by IHS Markit's Commodities at Sea suggests,
liftings from Saudi Arabia have remained close to six million bpd
since February, with Iraqi volumes averaging at 3.5 million bpd
since early 2019. UAE stands slightly lower, at 3.3 million bpd,
while Kuwait has been lifting around 2.15 million bpd during the
same period. Activity seems to have stabilised with producers
having met their targets, remaining at these levels even if Iranian
volumes have dropped significantly in April.
Time will tell how the market will react on 2 May, when the Iran
sanction waivers end. The effect is not expected to be dramatic
since oil importers have historically proved to be flexible in
taking measures to mitigate effects of similar changes in the
market. For Saudi Arabia, and other OPEC members, the major goal
remains stabilising the market without resulting in an oversupply
situation in the short-term that would cause oil prices to collapse
yet again. All signs still point to higher oil prices, if OPEC
doesn't cooperate and make any real addition to the global oil
supply. It will take a couple of months for the first shortages to
become visible, since inventories stand high. This is a good
opportunity for OPEC, since any further tightening of the market
could result in inventories lowering without creating a shortage.
Meanwhile, the other big question remains whether US shale will
manage to supply the markets with the necessary crude grades.
Focusing on Saudi Arabia, there seems to be no viable reason for
the country to increase its production any time soon, since the
current price is more than sufficient to support the Kingdom's
agenda, even at low production levels. Stability in the oil market
is considered essential for companies like Aramco to enter the
international bond market, securing low cost financing to boost the
economy in the short-term. Saudi Arabia and the UAE won't be forced
to adjust their output, especially since current crude oil prices
have had no significant impact on global economic growth so far.
But if required, OPEC could increase supply by around 1.5-2 million
bpd, with no action expected before the OPEC+ cut agreement gets
reviewed in June 2019.
China and potentially India are still expected to be in close
dialogue with Iran, spending the next couple of weeks to negotiate
conditions such as volumes and prices for any oil contracts with
Iran. Riyadh's position won't change easily, even if instability in
Libya further affects global supply. However, any dramatic loss of
Libyan crude volumes could shake OPEC's overall unwillingness to
increase its output in the short-term.
OPEC members believe, Russia might be reluctant to further
sustain output cuts, but there is still plenty of time till June
for the country to consider its approach in relation to the
scenario of US shale production expanding faster. The market is set
to become increasingly tighter during the US driving season. If oil
prices remain between USD 70 and 80 per barrel, OPEC+ members
remain satisfied, since global economic growth is not
threatened.
Without doubt, OPEC production should be flexible to provide
additional volumes to the market whenever required, to keep prices
below USD 80 per barrel. Saudi Arabia would remain below OPEC
imposed quota even if its production increases by another 500,000
bpd. This assumes no other OPEC member, or Russia, rush to take
over Iran's market share.
Posted 30 April 2019 by Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, S&P Global Market Intelligence
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May 20
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