Here's the Truth About Oil No One Saw, as OPEC+ Takes the Stage
As we head into the June 4 OPEC+ meeting, we're hearing a lot of chatter about what the next steps will be for oil-exporting nations, especially after its surprise 1.6 million barrel per day cut back in April. That was when the Saudi Energy Minister was at pains to inform the market how the "shorts would go ouch" if they bet against the establishment. This strategy worked well over the past few years when the oil market was extremely tight and continued trading higher, as Russia invaded Ukraine.
But in a market that is not seeing the same demand growth as in the post Covid era, this strategy is failing to prove effective. The price rally post their April cuts have already fizzled out as Brent is trading even lower than where it was prior to the cut. Today we hears whispers of yet more cuts.
What most fail to recognize is that oil as a commodity was never in shortage. It was and has been held back deliberately to prop up prices over the past few years.
What most fail to recognize is that oil as a commodity was never in shortage. It was and has been held back deliberately to prop up prices over the past few years. It was just a few years ago, prior to the Covid selloff, when Saudi Arabia and Russia were in a price war that saw prices collapse to $20 per barrel, from $65 bbl. as Saudi promised to pump even more to take market share from Russia as they refused to play ball. A lot has changed since then, especially as following the Covid scare, prices fell into negative territory which brought them all to the table to an agreed cut of 10 mbpd as it was in the group's interest. The Saudi price wars strategy failed back then as they could not contemplate that Covid could see prices move to negative. Today their recent price cut is another example of how short termism the region can be in defending prices without keeping the bigger picture in mind; a deflationary event is taking place around the globe especially in China. The producers can cut more to prop up prices, but these will only cause short term price spikes that will choke off demand even further.
The problem with the OPEC+ combined cuts is that Russia is failing to keep up with its promise of cutting production by 500,000 bpd. In fact, Russia is pumping ever more than before with no signs of easing back. This can be understood as Vladimir Putin needs to fund his war and monetizing the only asset he has, is the best way to do so. So, the OPEC-plus cut is falling on the shoulders of the other Middle Eastern countries like Saudi Arabia, UAE, and Iraq. To add insult to injury, Saudi Arabia is now losing market share to one of its key markets China. The data for May showed that a total of 27.73 million bpd of crude was offloaded at the ports of the two top consuming regions, China and India. This is about 8.6% higher than the 26.39 million bpd number in April. Russia has displaced Saudi Arabia as China's top supplier as their crude is so much cheaper even with the sanctions, with imports from the kingdom expected at 1.95 in May down from 2.07 mbpd in April. Surely these figures are not going to please the region. After all, the group is not set up to suit one party over the other, and certainly not for Saudi to lose out.
It remains to be seen what the group will announce at the end of this week. According to Novak, Russia, OPEC+ will leave output unchanged. But the jury is out.
If they did come in and announce a further cut, this will spook the market, because it will start pricing in some sort of a price war, which is never positive. All eyes are on OPEC+ and how the member nations handle this situation. Their decision will give the market a good view into how strong the new relations are and how much they are willing to sacrifice to keep it alive.
At the time of publication, Bengali had no position in any security mentioned.