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U.S.-Saudi-Russian Triumvirate Gives Oil Traders Heartburn

By Investing.com (Barani Krishnan/Investing.com)CommoditiesMay 01, 2019 02:20AM ET
www.investing.com/analysis/ussaudirussian-triumvirate-gives-oil-traders-heartburn-200413450
U.S.-Saudi-Russian Triumvirate Gives Oil Traders Heartburn
By Investing.com (Barani Krishnan/Investing.com)   |  May 01, 2019 02:20AM ET
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It looks like the Saudis have decided to give the U.S. President a little payback for the near $40 per barrel misery they endured last winter.

Saudi Energy Minister Khalid al-Falih’s clear disregard of Donald Trump’s attempt to corner OPEC into another production hike via a phone call supposedly placed to a mysterious source at the cartel tells us that Riyadh is digging its heels in for a fight with the White House over control of the world oil market.

No Output Hike; More Cuts Maybe, Say Saudis

Falih said the June meeting of OPEC+, which includes Russia, might actually extend production cuts till the year-end, rather than end them.

It’s interesting that his comments, made to Moscow-based news service RIA, came a day after Russian President Vladimir Putin gently reminded the Saudis that it was him, not Trump, who came to their rescue last year when OPEC was floundering. It makes sense, therefore, for the Saudi energy minister to seek common ground with his Russian counterpart Alexander Novak in ensuring supplies stay tight enough for oil to remain a seller’s market.

Brent Oil Weekly
Brent Oil Weekly

The popular theory is Saudi Arabia needs its oil to be around $80 a barrel to fund its budget. The IMF said earlier this week that the Kingdom needs the market to move up to $85 at least. Oil historian and Forbes senior contributor Ellen R. Wald, who also writes a weekly column for Investing.com, argues that neither is true. “Historically, Saudi Arabia has sought to maintain reasonable oil prices instead of prioritizing only high prices, because high oil prices lead to global recessions which depress oil demand,” she said in a Forbes post this week.

Production Cuts Also Political For Russia?

Putin’s stance itself is quite mystifying as Russia’s sovereign wealth fund chief Kirill Dmitriev and oil giant Rosneft’s (OTC:OJSCY) head Igor Sechin have cautioned in recent months that production cuts were costing their nation lost market share to U.S. crude.

These Russian oligarchs are openly pushing for more production to foster healthy competition in the world oil market. First Deputy Prime Minister Anton Siluanov said in December that Russia’s budget needed crude to be only at $42 a barrel.

So, if the economy isn’t the answer for Putin’s action, then politics is probably it, since Trump’s actions are also hurting Iran, one of Russia’s most important allies.

Saudi-Iran Relationship An Enigma Within OPEC

The Saudis, meanwhile, appear to have the best of three worlds as the Russians remain on their side, Trump unwittingly keeps oil at above $70 through his sanctions and their favorite enemy Iran gets the roast. To analysts covering OPEC, the relationship between the Saudis and Iranians must be an enigma, given their facade as brothers bonded for the common good of a vital commodity, while being ready to drive the stake into each other at the first opportunity.

For traders though, the actions of the U.S.-Saudi-Russian triumvirate are muddying the outlook for oil again.

Just a week ago, crude prices appeared destined to go only higher with the ban on Iranian oil, separate U.S. sanctions on Venezuela and unplanned outages in Libya and Angola all coming together to bear maximum upward pressure on a market that had already risen 32% in the first quarter.

But in Tuesday’s trade, even with fighting breaking out on the streets of Caracas between the forces of Venezuelan President Nicholas Maduro and his challenger Juan Guaido, oil prices could rise no more than half percent on the day and 6% for all of April. It doesn’t help that even in Venezuela, Maduro is backed by Putin while Guaido is Trump’s choice.

Trump Remains A Dangerous Wild Card To The Oil Market

With Trump back to first base with his quest for low gasoline prices ahead of the 2020 presidential elections, there’s no telling what he’ll do next. He has thus far been the most creative White House occupant when it comes to meddling with oil prices, and remains a dangerous wild card to the market as U.S. crude inventories start rising again.

Against the wishes of Iran hawks in his administration and Congress, rumor has it that Trump might still do a number on OPEC by giving China a special exemption to import from Tehran—especially if the cartel doesn’t play ball in raising output. Given his propensity for policy-making on-the-fly, it’s quite believable that he could resort to something like that.

While China has only been consuming about 500,000 barrels per day of Iran’s 1.1 million bpd output, it’s the impact of the Trump action that might matter to market sentiment—and help bring prices down. Of course, the Saudis and the Russians might cut even more barrels after that, leaving traders in an even more hapless state on market direction, especially if U.S. crude stockpiles continue growing.

U.S.-Saudi-Russian Triumvirate Gives Oil Traders Heartburn
 

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U.S.-Saudi-Russian Triumvirate Gives Oil Traders Heartburn

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Comments (7)
Francis Drake
Francis Drake May 02, 2019 7:36AM ET
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in 2025-2035 oil will disappear with ITER and DEMO fusion rector.In next years oil WTI wil drop below 20.Trump is a russian.
Titus Polichnia
Titus Polichnia May 01, 2019 1:27PM ET
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screw OPEC. I bought an electric car. If you hate OPEC, you should get one too
Ji Go
Ji Go May 01, 2019 1:27PM ET
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That’s cool, but that $7500 tax credit is over. I’ll wait for the robotaxi update.
Mike Sanford
Mike Sanford May 01, 2019 1:27PM ET
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you do realize that it takes oil to build and charge those piles, right?
inderjeet virk
inderjeet virk May 01, 2019 11:28AM ET
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tight diplomacy for Saudis  because they need American support but at the  same time Russian cooperation as well for future oil market stabilization .
Barani Krishnan
Barani Krishnan May 01, 2019 11:28AM ET
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Yes, very much Inderjeet.
inderjeet virk
inderjeet virk May 01, 2019 9:28AM ET
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tight diplomacy for Saudis ,definitely they need American support but at the same time they need Russian help for future oil market stabilization
Reginald Nkosi
Reggie432 May 01, 2019 5:22AM ET
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thank you for honest analysis...I think oil will be biased DOWN
Barani Krishnan
Barani Krishnan May 01, 2019 5:22AM ET
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Thanks much, Reggie. Please do continue reading/following us here and @Investingcom. My handle is barani_krishnan
Barani Krishnan
Barani Krishnan May 01, 2019 5:22AM ET
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Thanks for the feedback, Please do continue reading/following us here and @Investtingcom. My handle is barani_krishnan.
Dutch Oil sjeik
Dutch Oil sjeik May 01, 2019 4:24AM ET
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Interesting piece. But the rising inventories are the result of more imports and a withdrawal from the reserves. The price barely reacts anymore to the eia reports. What are your thoughts on this?
Barani Krishnan
Barani Krishnan May 01, 2019 4:24AM ET
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Thanks much. Rising inventories are also a result of less gasoline processing -- as was the case last week, at least -- by refiners reacting to diminished margins. In a way, it's the refiners' squeeze on the market, just like what OPEC's doing on the drilling/shipment side. Of course, it's not really a case of demand, with the warmer U.S, weather already encouraging road travel before the actual onset of summer. Therein your point that imports are rising well. It's an interesting mix of factors that ultimately lead to more muddying of the waters.
Barani Krishnan
Barani Krishnan May 01, 2019 4:24AM ET
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Rising inventories are also the result of less gasoline processing -- as was the case last week at least -- as refiners hold back after diminished margins. In a way, this is like the refiners' squeeze on the market, not unlike the drilling/shipment squeeze being applied on the market now by OPEC.
Barani Krishnan
Barani Krishnan May 01, 2019 4:24AM ET
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Bur the slower gasoline processing isn't necessarily indicative of weaker demand as the warmer U.S. weather is already encouraging more road travel even before the onset of summer. So,. crude imports are rising as well in anticipation of gasoline ramp-up that will eventually come.
Barani Krishnan
Barani Krishnan May 01, 2019 4:24AM ET
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Therefore, you have an interesting set of countervailing factors, which serve to further muddy the immediate outlook for oil.
Ji Go
Ji Go May 01, 2019 3:19AM ET
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Mr. Krishnan, long time no speak!You are 100% right in describing the trading environment as “hapless”. I’m kicking myself for not closing my long WTI trades when prices broke $65/bbl. :(*Russia did exACTly what you said with a “reminder” to Riyadh about who was “big brother”: almost on cue!I’m unwinding my long plays, as I expect this to be the top. Trade deal going through will be final upside catalyst that will be underwhelming and short-lived. All that’s left after that is Saudi to give in and drop the flag to commence the price war. Riyadh won’t get away with dubbing themselves the self-proclaimed demand gap filler. That will be a death knell to Russian cooperation. At the same time Riyadh can’t afford to let Russia swoop in and grab market share in plain sight, which is what Putin is obviously angling for.
Show previous replies (7)
Barani Krishnan
Barani Krishnan May 01, 2019 3:19AM ET
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Dutch Oil sjeik  and the rest here, the Investing site is having server delays this morning. I wasn't aware of that, and I repeated some of my replies to you people. You'd probably end up reading my comments later in the day. Thanks much for the feedback and engagement, people.
Ji Go
Ji Go May 01, 2019 3:19AM ET
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I had to chuckle at the brotherhood comment. Money: makes friends out of sworn enemies. :-)) @Dutch: I don’t think 80 is achievable in this bull cycle unless 1 of the 3 major players (US, Saudi, Russia) goes offline for some reason. That is a remote near impossibility.
Barani Krishnan
Barani Krishnan May 01, 2019 3:19AM ET
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Ji Go  Agree. Don't see $80 for now, unless POTUS decides to go golfing full-time.
Ji Go
Ji Go May 01, 2019 3:19AM ET
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His vacation....’gonna be UUUGE’ as the kids say.
Barani Krishnan
Barani Krishnan May 01, 2019 3:19AM ET
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Ji Go  You got me there :)
 
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