A weekly look at what occurred in the oil markets of the U.S. and the world this past week and what’s ahead.
Time’s just about up.
Early next month, the six-month waivers granted to eight countries that allowed them to continue importing Iranian oil despite U.S. financial sanctions will expire. The eight nations: China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey.
It can be argued that those waivers are somewhat responsible for the current high price of oil today. That is counter-intuitive; how did allowing oil on the market that otherwise might have been stuck in Iran push the price higher?
The answer, from a lot of analysts who follow OPEC and Saudi Arabia, is that the Saudis were not pleased with the waivers granted by the Trump administration that allowed the Saudi rival nation to continue exporting large quantities of crude. The analyst view is that after that, no number of Donald Trump “OPEC should produce more” tweets after granting those waivers was going to stop the Saudis from persuading OPEC to make deep cuts in supply to strengthen markets. If the U.S., a supposed Saudi ally, was going to give Iran that break, why shouldn’t OPEC act to support markets which at that point were about $60/barrel (b) for Brent, on their way to $50.
OPEC has stabilized the market with spectacular results, helped along by a huge drop in Venezuelan output and Libyan turmoil. According to data from S&P Global Platts, the group’s production in March was just 30.23 million barrels per day (b/d). In November, before its early December meeting at which cuts were agreed upon in cooperation with a group of non-OPEC countries led by Russia, it was just over 33 million b/d, for a cut of almost 3 million b/d. Brent is now near $72/b.
Brian Hook, the administration’s special envoy for Iran, told Reuters several weeks ago that three of those eight nations – unidentified – had stopped importing Iranian oil. (Japan and South Korea are believed to be two of the three.) And waivers aside, the sanctions are hitting Iranian production. OPEC’s own estimate of Iranian production put it at 3.6 million b/d in the third quarter of last year. In the latest Platts report, it was down to just under 2.7 million b/d.
That the market is tighter is reflected not just in the rise in the outright price of crude. The market is in backwardation when looking at current prices versus next January, where the spot price is higher than the out-month price. A perfectly-balanced market is in contango, with the out-month price higher than the spot month price to reflect the time value of money and the cost of storage. But the Brent market is in an almost $2.70/b backwardation out to January. That is clearly the sign of a tightening market. (It may seem counterintuitive that a tight market would have prices in the future lower than the present. But it happens because of strong demand for the most current barrel, which boosts prices relative to those in the future.)
Yet there is an election next year and a President who has tweeted roughly a dozen times about the need for OPEC to act to reduce oil prices. It is far from clear what OPEC will do when it meets in June. Further cuts are not viewed as likely and Russia has indicated it may not be interested in keeping up its cooperation, which has been unenthusiastic at best. But Saudi Arabia cut far more than what had been expected and shows few signs of planning for any sort of reversal. Long-range forecasts, like that of the International Energy Agency, are showing that supply and demand are in balance but with inventories still at levels that might be considered excessive.
Given that, if the Trump administration yanks the waivers and those eight countries drop their Iranian imports to zero, it is unlikely that Iran’s 2.7 million b/d can hold. The formula then for the Trump administration is whether a market that is already showing signs of being balanced to being tight can take another reduction of oil supply.
Hook said the U.S. wants to zero out Iranian exports, though that does not mean going to zero in output from 2.7 million b/d. Recent press reports are that Iranian crude exports are down to about 1 million b/d with the remainder processed internally. A reduction then of another 1 million b/d would almost certainly send prices higher. With the Saudis having shown that they are not particularly impressed by the Trump tweets on oil and likely to hold the line on their now-reduced production, it raises the question of where such a gap is going to be filled from if keeping oil prices in check is a key administration goal.
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A decidedly pro-oil government has been elected in the Canadian oil-producing province of Alberta.
Jason Kenney is the province’s new premier and he marks a distinct shift from the previous premier, Rachel Notley, who instituted a carbon tax in the province.
Kenney has vowed to repeal that carbon tax and has promised to enlist Alberta along with other provinces in the fight against Canada’s federal carbon tax. He also has threatened to cut off oil shipments to neighboring province British Columbia over the latter’s opposition to pipeline expansion, including the Trans Mountain Pipeline, a federal government-owned pipeline that takes crude from Alberta to the Pacific Ocean for export. (The Canadian government told Kenney it would give its final decision on allowing the expansion – or blocking it – in late June). There is a similar dynamic brewing between Kenney and the province of Quebec.
The key switch is that Notley, leading the province’s New Democratic Party, needed to be a supporter to some degree of the province’s key industry, oil and gas, but her focus on climate change, as evidenced through the carbon tax, clearly set her aside from the more conservative governments that traditionally had led Alberta. Kenney is much more in that traditional mold.