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With Russia Cold To Cuts And Libya On Fire, OPEC Supply Squeeze May End

By Investing.com (Barani Krishnan/Investing.com)CommoditiesApr 09, 2019 03:26AM ET
www.investing.com/analysis/with-russia-cold-to-cuts-and-libya-on-fire-opec-supply-squeeze-may-end-200404971
With Russia Cold To Cuts And Libya On Fire, OPEC Supply Squeeze May End
By Investing.com (Barani Krishnan/Investing.com)   |  Apr 09, 2019 03:26AM ET
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The writing is on the wall: Saudi Arabia and its oil-producing allies can’t keep up very much longer with production cuts the way they’ve been going.

Saudi Energy Minister Khalid al-Falih said on Monday it was premature to establish whether a consensus existed among a global oil-producers' alliance to extend supply cuts, adding that a meeting next month would be key for deciding.

Brent Daily Chart
Brent Daily Chart

That itself was the clearest sign that there were divisions on how much longer the 14 members in the Saudi-led OPEC and ten other oil producers led by Russia should grit their teeth and stick to highly disciplined production quotas when oil at $70 was proving too tempting not to cash in with extra barrels.

Manipulating Supply Not Russia’s Style

According to reports quoting insiders of the OPEC+ alliance, high on the list of the discontent members was Russia, which was stuck in a pact that cramped its regular style of working the energy markets.

Although oil is important to Russia’s coffers, the country has no national oil company, unlike Saudi Arabia and the rest of OPEC. While oil pipelines in Russia are owned and operated by state monopoly Transneft, the oil companies themselves, including Rosneft—its biggest—and others like Lukoil (MCX:LKOH), Surgutneftegaz (MCX:SNGS), Gazprom Neft (MCX:SIBN) and Tatneft (MCX:TATN), are used to free-market competition and winning on best prices and services. They don’t need to manipulate production in order to create artificial shortages that would boost prices, which instead is a Standard Operating Procedure within OPEC.

In the past three years, the Russians have entered production cut pacts with the Saudis twice to bring oil prices back from market collapses that took crude to as low as $26 per barrel at one point. In an overwhelmingly bullish market like now, they’d rather compete on an even keel with the best out there. They can afford to: in December, the Russian breakeven price for oil was $42 a barrel, just half of the $84 needed by the Saudis.

Until this week, bets were high that the 24-nation OPEC+ would extend its production cuts of 1.2 million barrels per day when it meets in June.

OPEC Might Decide By May Where It’s Going With Cuts

But the Saudi energy minister said a decision might be taken earlier, at a lower-key technical grouping in May, and it may not necessarily involve an extension. "I don't think we will need (to do more) ... the market is on its way toward balance," he said, referring to the possibility of Saudi Arabia cutting output further below its target under the deal.

Falih’s comments seemed designed to accommodate his Russian counterpart Alexander Novak who, according to those familiar with Moscow's energy policy, was "under too much pressure internally to end the cuts". Rosneft CEO Igor Sechin is among those dead-set against OPEC+, telling Russian President Vladimir Putin in a letter leaked in February the pact was a strategic threat to Moscow, which played into the United States’ hands.

And Russia isn’t the only one having difficulty continuing with cuts. For the third consecutive month in March, Nigeria failed to comply with the production quota It was given under the OPEC+ arrangement, pumping beyond what it pledged. The Nigerians were allowed a quota 1.685 million barrels per day but ended up producing 1.92 million in March.

Global pressure, led by U.S. President Donald Trump, is expected to grow on OPEC to abandon its production cuts as a civil war wages in Libya, threatening the North African country’s output of 1 million bpd. Coupled with U.S. sanctions on Iranian and Venezuelan crude, a Libyan outage might be a recipe for a global supply disaster that the Saudis simply cannot ignore—if indeed, as they claim, the objective of OPEC’s cuts was to achieve “market rebalancing”, not just super high oil prices.

Saudi Arabia Placating Trump Too

Olivier Jakob, who heads oil consultancy PetroMatrix in Zug, Switzerland, said the Saudis also seem to be placating Trump with their apparent openness in winding down some of their production cuts early. Jakob said:

"Saudi Arabia will continue to claim that it does not listen to Trump but we take (their) small change of tone as a first sign of appeasement."

He added that Riyadh last week increased most of its official selling price, or OSP, for crude particularly to Europe.

Hedge funds long on oil will count on OPEC to tell another intimidating tale of tightening supply in its monthly report slated for release on Wednesday that could further fuel the year-to-date rally of 40% in WTI and 31% in Brent.

One reason the Saudis may be willing to let their guard down a little on production is the roaring market reception to the bond issue linked to the first public sale of shares in their state oil company Aramco.

Will The Saudis Show Some Magnanimity After Aramco Bond Issue?

Aside from getting the oil price it wants for its national budget, the Aramco IPO has been top-most priority for the Kingdom. By Monday, the Saudi oil company had received bids for more than three times the $10 billion it was expected to raise in a debut international bond issue.

John Kilduff, founding partner at New York energy hedge fund Again Capital, said:

“The oversubscription for the bonds is a major endorsement for the Saudis and Aramco.”

“They should be able to relax a little this point and show a little magnanimity too.”

With Russia Cold To Cuts And Libya On Fire, OPEC Supply Squeeze May End
 

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With Russia Cold To Cuts And Libya On Fire, OPEC Supply Squeeze May End

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Comments (3)
blue light
blue light Apr 10, 2019 5:38PM ET
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interesting...
Sam Samy
Sam Samy Apr 09, 2019 9:42AM ET
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great review
Barani Krishnan
Barani Krishnan Apr 09, 2019 9:42AM ET
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Thanks much!. . Do continue following us here and @Investingcom.. . My handle is @barani_krishnan
Ji Go
Ji Go Apr 09, 2019 6:52AM ET
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The Aramco IPO is the basis for the crude market going back to Nov 2016. Had it not been for the Crown’s divesting ambitions, there would still be a price war with a cap of probably $45/bbl (WTI). Once Saudi gets their capital infusion and their divesting operation fully underway, watch the glue that’s been holding this entire bull market together vaporize almost instantaneously. Oil is in an uptrend until the IPO. Book it.
Show previous replies (8)
Ji Go
Ji Go Apr 09, 2019 6:52AM ET
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Everybody “needs” margin John, but why would OPEC lose any sleep over US concerns when we are willing to pump the market into oblivion? There’s monopoly, there’s oligopoly, there’s free market. Conventional wells are still significantly cheaper to drill atm than shale. OPEC can starve shale out of the market: supply all US customers at prices that make drilling economically infeasible and force the US back into a net importing position. After enough bankruptcies and capacity is taken off the table they can force compliance by always dropping prices when US overproduces. There would be a lot of blood and carnage to go with it, of course, but it is an option. Don’t feel that OPEC+ DeBeer’s style supply-side mgmt is a forgone conclusion.
Ji Go
Ji Go Apr 09, 2019 6:52AM ET
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You are exACTly right. And I read what you say and know exactly what you mean (with emphasis). I agree with you 200%.
Barani Krishnan
Barani Krishnan Apr 09, 2019 6:52AM ET
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Ji Go  Right on money, Ji Go.. . Shale was the Uber of the oil industry though like the iconic ride-hailing service, it's struggling to keep up with its amazing start. But with the big boys -- i.e. XOM, CVX -- getting in, its hand may just get stronger though. Whether that will add to net barrels or just refocus offshore to onshore is another question.
Ji Go
Ji Go Apr 09, 2019 6:52AM ET
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Like I said in a previous article of yours the new OPEC will have members consisting of XOM, CVX, COP, etc. vs SA, Venezuela, Nigeria, etc. and when you have the lifeblood of the global economy in the hands of a handful of private interests based out of one nation GOD/Allah/Krishna/Heaven/Nirvana help the rest of the world. The next world war will be waged with computers, currency, and embargoes as we’re already witnessing.
Barani Krishnan
Barani Krishnan Apr 09, 2019 6:52AM ET
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Ji Go  I love the Godly references!. . God help us indeed.. . One MbS is already too much for this world :)
 
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