Talks of supply cut, possible Sino-US trade truce buoy oil prices
Expectations from the prospect that Saudi Arabia will push OPEC and Russia to cut supply towards the end of the year and signals of truce in the Sino-US trade dispute have made oil prices to rise four sessions in a row on Monday.
A trade dispute between the United States and China is one reason investors are a lot warier about the outlook for oil demand growth next year.
However, the Organisation of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, is pushing for the group and its partners to reduce output by one million to 1.4 million barrels per day to prevent a build-up of unused fuel.
“It appears that the market takes a production cut for granted. We’ll see if it is right after the next OPEC meeting on December 6. It is not unreasonable to anticipate stable prices until then,” PVM Oil Associates strategist, Tamas Varga, said.
Russian energy minister, Alexander Novak, said on Monday that Russia, not an OPEC member, planned to sign a partnership agreement with the group, and that details would be discussed at OPEC’s December 6 meeting in Vienna.
Brent crude futures were up 24 cents at $67 a barrel by 1000 GMT, while US futures rose 38 cents to $56.84.
Despite Monday’s gains, Brent is almost 25 percent below early October’s 2018 peak of $86.74, as evidence of slowing demand has materialised and output from the US, Russia and Saudi Arabia hit historic highs.
Wall Street had firmed on Friday after US President Donald Trump said he might not impose more tariffs on Chinese goods after Beijing sent a list of measures it was willing to take to resolve trade tensions.
The comment stoked speculation of a deal when Trump meets Chinese President Xi Jinping on the sidelines of a G20 summit in Argentina later this month.
It is important to note also that the actions and tweets of Presidents Donald Trump and Vladmir Putin and Crown Prince Mohammed Bin Salman have replaced OPEC’s control of the oil market.
The moves (or tweets) of these three men will determine the course of oil prices in 2019 and beyond. But of course they each want different things, according to a Bloomberg report.
While the OPEC struggles to find common purpose, the US, Russia and Saudi Arabia dominate global supply. Together they produce more oil than the 15 members of OPEC. All three are pumping at record rates and each could raise output again next year, although they may not all choose to do so.
Bin Salman needs oil revenue to fund his ambitious plans to transform Saudi Arabia, while avoiding unrest from those hurt in the process. The International Monetary Fund forecasts that the kingdom will need oil price of $73.3 a barrel next year to balance its fiscal budget. Brent crude is trading about $5 below that, with Saudi Arabia’s exports trading at a discount to the North Sea benchmark. Prolonging output cuts for a third year is the only way he can realize the price he needs.
He will face more challenges from Putin and Trump. The Russian president shows no great enthusiasm for restricting his country’s production again. Moscow’s budget is much less dependent on oil prices than it was when Russia agreed to join OPEC-led efforts to re-balance the oil market in 2016 and the country’s oil companies want to produce from the fields where they have invested.
Putin may yet decide that maintaining his improved political relationship with MBS, as the Crown Prince is known, is worth a small sacrifice. But it is not a foregone conclusion that Russia will agree to extend output cuts when producers gather in Vienna next month. Putin says oil prices of around $70 a barrel suit him “completely.”
The opposition from Trump will — naturally — be much louder and comes at a time when he and MBS are trying to preserve their political relationship, while American senators consider harsher sanctions on Saudi Arabia in response to the war in Yemen and the killing of dissident journalist Jamal Khashoggi.