Barrons | Dimitra DeFotis: Saudi Arabia’s energy minister indicated Monday that not only is the extension of oil production cuts likely, it could extend past December.
The six-month production cut agreement initiated this year, with the goal of boosting oil prices, expires in June. The Organization of Petroleum Exporting Countries meets May 25 in Vienna, Austria and is likely to approve an extension. Oil prices took a tumble last week, and the international Brent benchmark is hovering near $49 per barrel, while the U.S. West Texas Intermediate contract is trading near $46. Each price is down fractionally today.
With U.S. oil producers boosting supplies, Iran and Russia, along with Saudi Gulf allies, have indicated support for an extension of production cuts. SGH Macro Advisors CEO Sassan Ghahramani and senior analyst Kevin Muehring think the Saudis have no alternative, even if they lose some market share to rivals Iran and Iraq:
” … Bolstering what it sees as an important strategic alliance on oil between the Kingdom and Russia, China has offered its full support, promising to purchase additional crude oil as needed to help bring oil prices back above $50, which it would put into its Strategic Petroleum Reserves. Chinese President Xi Jinping and Russian President Vladimir Putin will be meeting in Beijing in mid-May … In Saudi Arabia, the architect of the current Saudi oil policy, Deputy Crown Prince Mohammed bin Salman, gave a well-prepared interview on Saudi television [in late April], staunchly defending the current oil strategy and vowing to proceed with the 2018 global IPO of 5% of Saudi Aramco … In a phone call between Chinese Premier Li Keqiang and Russian Prime Minister Dmitry Medvedev in March, the two agreed the then weakening oil price was the result of “US manipulation” and was not sustainable relative to “the further recovery of the global economy in 2017. Medvedev told Premier Li that Saudi Arabia and Iran both agreed with Russia on oil prices that should rise to $60 a barrel, and Li affirmed that China is willing to work with Russia and Saudi Arabia to maintain the relative stability of global oil prices …”
Reuters‘ senior market Analyst John Kemp doesn’t think the extension of cuts will boost prices much with global oil supplies high. But he says more cuts would stop oil prices from weakening further. He quoted Saudi energy Minister Khalid al-Falih:
“Based on consultations that I’ve had with participating members, I am confident the agreement will be extended into the second half of the year and possibly beyond,” al-Falih told an audience in Kuala Lumpur on Monday. “I believe the worst is now behind us with multiple leading indicators showing that supply-demand balances are in deficit and the market is moving towards rebalancing.”
It’s an about face for the Saudis and al-Falih, who said in January that a production cut extension was unlikely. Thomas Kee, who offers trading strategies online at Stock Traders Daily, makes the bullish case for oil in an opinion piece for MarketWatch:
“… Oil bears have been using seasonal weakness in conjunction with a recent lack of confirmation from Russia to promote the negative side of the debate, and bulls have had little ammunition, until now. Russia is finally vocalizing support, the Saudis and Russia are talking about extending beyond six months too, and material deficits are on the immediate horizon. But there is also a wild card and a long-term catalyst. The wild card is the possible border tax, and the long-term influence is the lack of new projects to meet increased global demand in the years ahead …”
The United States Oil Fund (USO) is up fractionally today. Russia’s Lukoil (LUKOY) is up 1.5% in U.S. trading, while Colombian producer Ecopetrol (EC) was up 0.7%. Conversely Argentina’s YPF (YPF) fell 1.5%, Brazil’s Petroleo Brasileiro (PBR) fell 1.4%, China’s CNOOC (CEO) slipped 1% and PetroChina (PTR) fell 0.7%.