Goldman: No One Knows What's Going On In Oil Markets
There has always been a lot of uncertainty around oil demand and supply, and in recent years this uncertainty has become excessive. Now, this level of excess uncertainty has got analysts struggling to make forecasts about demand and supply.
Bloomberg this week quoted Goldman Sachs’ commodities chief Jeffrey Currie as saying it has become “increasingly difficult to know what production levels will balance the market.” Currie was referring to the decision OPEC+ needs to make at the start of next month on whether to continue cutting production or start increasing it. The analyst attributed this higher difficulty to the lack of clarity around Iranian exports and steadily rising U.S. production.
The former factor has made Saudi Arabia reluctant to live up to its promise to fill any gap left by sanctioned Iranian oil: it does not know exactly how deep a gap there is, so it risks oversupply if its ramps up production in the blind. The latter factor has also contributed to expectations of a global oversupply, which has pushed prices down. Now add the U.S.-China trade war that consensus opinion says will affect global economic growth and a picture of uncertainty emerges that would probably make some analysts wish for a different career.
However, as usual, this sort of general picture tends to overlook the details. Some of these include the fact that any oversupply resulting from growing U.S. production will be oversupply of light crude while the market for heavy crude swings into a shortage on the back of Venezuela and Iran sanctions. All reports about the U.S. tipping the oil market into excess supply are based on data about production in the shale patch, and the shale patch produces light crude. There are heavier grades produced in the Gulf of Mexico but these tend to stay out of the oversupply stories.
Then there is OPEC+, which grabs headlines ahead of every meeting. Also ahead of every meeting there is debate on whether the cartel and its partners will extend the cuts. Truth be told, in previous meetings the debate was rather pointless because it was all but clear that they would agree on cuts since they were relatively good for everyone. Now, analysts are less certain that the cut extension that’s been the talk of the industry will take place, and that’s because of another oversight: it’s never just about oil prices.
It’s no secret that ever since OPEC teamed up with Russia on production cuts it lost a lot of its influence: Russia is a bigger producer than Saudi Arabia and any whiff of it leaving the agreement pressures prices, which is something OPEC members do not like to see. Some go as far as to say that Russia is pulling the OPEC strings. And Russia is quite happy with lower priced oil, while its OPEC partners, especially Saudi Arabia, need higher barrel prices. So is it any wonder that media reports emerged about Aramco extending its offer for a stake in Novatek’s Arctic LNG 2 ahead of the OPEC+ meeting after earlier reports claimed the Saudi company had pulled out of the project?
Of course, it could be a coincidence, but if there is one rule in international politics it is that nobody gets something for nothing. There is no reason why Russian-Saudi relations should be any different than, say, U.S.-German ones when it comes to energy in general and natural gas specifically. It is possible that Russia will back a cut extension if Saudi Arabia returns the favor appropriately. But it is also possible that something else takes priority, such as market share protection.
“It’s much easier to unify a position, when there is a supply disruption or a strong demand, then both Russia and Saudi Arabia want to grow production,” Currie told Bloomberg this week. Yet right now “it’s a very middling environment. This makes those tensions between Russia and Saudi Arabia more apparent.”
The silver lining is that we won’t have to wait long for some certainty. OPEC+ is meeting in the first week of July.
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