Whether you are a bond, stock, or commodity trader, whatever book you run, you will always have one eye focused on the price of oil. And oil can normally mean one, or more, of three things—the price of West Texas Intermediary (WTI), the price of Brent Crude, or the oil output from the Kingdom of Saudi Arabia.
In reality, the bat-and-ball game between Brent and WTI is a bit of a false starter. WTI trades at a discount to Brent, because as far as US domestic consumption is concerned, it’s a safer bet. It’s local, and there are fewer international concerns to consider, such as what is happening with the Euro, or the latest Brexit uproar.
These two giant oil markets obviously shadow one another, with Brent normally 5-6 USD higher than its Texan cousin. Currently, the spread is around 5 USD in favor of Brent, but it has been just below zero on numerous occasions, and from time to time Brent has outpriced WTI by as much as 16 USD.
Following the ascension of Donald Trump to the US presidency, in spite of a flood of naysayers that crawled out from under the floor boards, the American economy is doing well. And the oil price is matching the rise in US stocks, with the WTI/Brent coupling at 72/67 USD. This is significant climb from the lows of February 2016, when the pair stood at 27/36 USD.
But as much as traders focus on the game of tip-toe played out in the Texas/North Atlantic fields, the most important statistic in the price of oil is the volume of Saudi Arabian oil output. Recently, following behind-the-scenes pressure from the White House, the Kingdom agreed to raise its output to take some of the heat out of the market, which had witnessed a steady rise since early 2016. However, after apparently hiking production in June 2018, the Saudis then lowered production in July by around 200,000 barrels per day. The Saudi response to queries raised by the Americans was that their action simply reflected a lower demand from their customers.
The fly in the ointment is the current international position with Iran. In November 2018 the US will impose a new round of sanctions on Iran, which will affect that country’s international oil sales. In light of the projected shortfall in oil supply, theoretically, Saudi Arabia should be steadily increasing its oil reserves by increasing output. However, by increasing output, and hence supply, economic forces will likely see a reduction in the oil price itself, which is something that would then damage the Saudi economy. Additionally, while Saudi Arabia hardly sees eye to eye with Iran politically, it does consider Iran a fellow OPEC member, and there is an issue of honor at stake, and a lack of inclination to upset a fellow team member.
Saudi Arabia’s recent action has certainly raised a few eyebrows in the White House, where some decision to increase supply had been agreed. Clearly the months leading up to November will see further volatility in the price of oil, with all eyes firmly focused on any further action taken by the kingdom of Saudi Arabia.