Crude Oil Trade: Oil prices fall as President Trump requests Saudi Arabia to increase output, but OPEC+ cuts remain in place

With Iranian sanction waivers coming to an end, oil traders must quickly adjust to the new market conditions. There is still optimism that at some point, maybe later this year, Saudi Arabia and other OPEC members might start filling the gap by increasing their output. But comments recently made by officials of Saudi Arabia and the UAE suggest that the cartel is not willing to take any action that would push oil prices significantly lower. Brent has dropped since last week, returning once again to levels close to but still above USD 70 per barrel early on Monday morning (UK Time). But this fall only came after US President Trump urged greater OPEC output to replace Iranian barrels. Saudi Arabia's energy minister commented that there is no need to raise oil output immediately, as "inventories are actually continuing to rise despite what is happening in Venezuela and despite the tightening of sanctions on Iran". He also noted that his country's oil production in May is set to remain pretty much the same as the last couple of months.

As recent data by IHS Markit's Commodities at Sea suggests, liftings from Saudi Arabia have remained close to six million bpd since February, with Iraqi volumes averaging at 3.5 million bpd since early 2019. UAE stands slightly lower, at 3.3 million bpd, while Kuwait has been lifting around 2.15 million bpd during the same period. Activity seems to have stabilised with producers having met their targets, remaining at these levels even if Iranian volumes have dropped significantly in April.

Time will tell how the market will react on 2 May, when the Iran sanction waivers end. The effect is not expected to be dramatic since oil importers have historically proved to be flexible in taking measures to mitigate effects of similar changes in the market. For Saudi Arabia, and other OPEC members, the major goal remains stabilising the market without resulting in an oversupply situation in the short-term that would cause oil prices to collapse yet again. All signs still point to higher oil prices, if OPEC doesn't cooperate and make any real addition to the global oil supply. It will take a couple of months for the first shortages to become visible, since inventories stand high. This is a good opportunity for OPEC, since any further tightening of the market could result in inventories lowering without creating a shortage. Meanwhile, the other big question remains whether US shale will manage to supply the markets with the necessary crude grades.

Focusing on Saudi Arabia, there seems to be no viable reason for the country to increase its production any time soon, since the current price is more than sufficient to support the Kingdom's agenda, even at low production levels. Stability in the oil market is considered essential for companies like Aramco to enter the international bond market, securing low cost financing to boost the economy in the short-term. Saudi Arabia and the UAE won't be forced to adjust their output, especially since current crude oil prices have had no significant impact on global economic growth so far. But if required, OPEC could increase supply by around 1.5-2 million bpd, with no action expected before the OPEC+ cut agreement gets reviewed in June 2019.

China and potentially India are still expected to be in close dialogue with Iran, spending the next couple of weeks to negotiate conditions such as volumes and prices for any oil contracts with Iran. Riyadh's position won't change easily, even if instability in Libya further affects global supply. However, any dramatic loss of Libyan crude volumes could shake OPEC's overall unwillingness to increase its output in the short-term.

OPEC members believe, Russia might be reluctant to further sustain output cuts, but there is still plenty of time till June for the country to consider its approach in relation to the scenario of US shale production expanding faster. The market is set to become increasingly tighter during the US driving season. If oil prices remain between USD 70 and 80 per barrel, OPEC+ members remain satisfied, since global economic growth is not threatened.

Without doubt, OPEC production should be flexible to provide additional volumes to the market whenever required, to keep prices below USD 80 per barrel. Saudi Arabia would remain below OPEC imposed quota even if its production increases by another 500,000 bpd. This assumes no other OPEC member, or Russia, rush to take over Iran's market share.

Posted 30 April 2019 by Fotios Katsoulas, Associate Director, Lead Analyst Tanker Shipping & Alternative Fuels, S&P Global Commodity Insights