Trump, Saudis, Russians Could Beat The Oil Market Into Submission, Despite Iran And Venezuela

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Includes: BNO, DBO, DNO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: Robert Boslego
Summary

President Trump asked Saudi Arabia to pump up to 2 million more barrels.

KSA agreed due to the strategic alliance with the U.S.

Updated projections show global oil stocks rising as a result of higher production.

The U.S. stands ready to tap the SPR, if needed.

Together, the U.S., Saudi Arabia and Russia could beat the oil market into submission.

Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference...Prices to high! He has agreed!,” President Trump tweeted Saturday, June 30th.

The White House clarified that the King told Trump that KSA has 2 million barrels of spare capacity “which it will prudently use if and when necessary to ensure market balance and stability, and in coordination with its producer partners, to respond to any eventuality.”

Separately, it was reported that Saudi sources have said that July’s production will be around 11 million barrels per day (mmbd), up about 1 million from its quota under the OPEC+ deal. Russia is reportedly on its way to increasing production by about 300,000 b/d, and Kuwait and the UAE a combined total of 300,000 b/d in the months ahead. I have added those estimates to the EIA’s June Short-Term Energy Outlook in the table below, which was based on OPEC production of about 31.9 mmbd for the second half of 2018.

On the negative side, I have assumed that Venezuela’s production will continue to drop at the same rate as over the past six months, about 70,000 b/d per month, or 2 million barrels per month. I have also assumed that Iran’s production begins to drop in July by 100,000 b/d and accelerates to 400,000 b/d through October. In November, when the sanctions are scheduled to go into effect, I assume Iran’s production drops by 1 million per day. Finally, I assume that Libya’s output remains about 250,000 b/d lower than recent levels due to political instability.

Under that set of assumptions, global OECD stocks rise by 91 million barrels over the second half of 2018, ending the year at 2.944 billion barrels, about 50 million barrels higher than December 2017. That should be enough to push WTI prices to the mid-to-lower $50s, consistent with where President Putin wants.

Million Barrels Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Total
OECD - STOCKS 2850 2851 2863 2866 2871 2853
Saudi + 1 30 30 30 30 30 30 180
Venezuela -2 -4 -6 -8 -10 -12 -41
Iran -3 -6 -9 -12 -30 -30 -90
Libya -7.5 -7.5 -7.5 -7.5 -7.5 -7.5 -45
Russia 3 6 9 9 9 9 45
GCC 0 6 9 9 9 9 42
Total 2871 2896 2933 2957 2963 2944 91

KSA would no doubt prefer higher oil prices in the short term to balance its national budget. However, it must consider its strategic alliances with the United States and Russia, as much more important to its long-term survival and prosperity.

Trump chose Saudi Arabia for his first foreign trip in 2017. He received a “royal” welcome.

Since then, the two countries have announced several hundred billion dollars in business deals, and Deputy Crown Prince Mohammed bin Salman (MBS) made a month-long tour in the spring to the U.S., meeting government and business leaders. He seeks to transform the economy of Saudi Arabia and needs America’s help.

In contrast to President Obama, Trump has hardened the U.S. approach toward Iran by pulling out of the nuclear deal with Iran. Now, this past week, the State Department issued guidelines that international oil companies cease all Iranian oil purchases by November 4th. Given the relationship between Saudi Arabia and Iran, the Saudis must be very pleased and willing to support Trump’s aggressive moves against Iran.

In the press conference following the OPEC+ meeting on June 23rd, Saudi oil minister Khalid Al-Falih said:

As far as I’m concerned, as the minister of Saudi Arabia, it’s important to respect the decisions of the group (OPEC) and to try to stay within it. But my bigger guiding principle is to be respectful for the market needs.”

Strategic Petroleum Reserve

U.S. Secretary of Energy, Rick Perry, said the United States remains ready to tap the Strategic Petroleum Reserve, if necessary, but that at the moment “I wouldn’t recommend it.” The SPR currently has about 660 million barrels and has a drawdown capacity of up to 4 million barrels per day.

Congress has authorized a drawdown of 270 million barrels over a 10-year period to fund various budget bills. Trump had previously mentioned he would like the drawdown to be accelerated. If the Iran sanctions continue into 2019, and Iranian or Venezuelan production falls, I would expect Trump would tap the SPR. He could add 1 million barrels per day for a year, drawing the reserve down to about 300 million barrels, for example. That would still provide a healthy stockpile for future emergencies.

Conclusions

The prospect of a major reduction in Iran’s production and the further erosion of production in Venezuela have caused oil prices to spike. But as the table above depicts, there is more than ample production capacity to cool prices, and that does not include an SPR release.

The unfolding geopolitics among the U.S., Saudi Arabia and Russia have shifted the landscape. Now the three largest oil producers are all on the same side. Together, they can keep a lid on oil prices, and dampen market fears.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.