Talk between OPEC and Russian officials of unwinding their deal to cut output has cooled overheating oil prices, at least for the moment.
International prices, which hit a high of $80 a barrel in May, are now more likely to head back to $50 a barrel rather than continue surging toward the feared $100 level. Oil prices in the United States are at an eight-week low, hovering around $64.50 a barrel on Tuesday for West Texas Intermediate, as U.S. production continued its climb toward 11 million barrels a day.
A betting man, though, would still be smart to put money on prices remaining robust given the unsettled fundamentals in the market. There’s too much at stake for Saudi Arabia, the leader of the Organization of Petroleum Exporting Countries, to let prices fall too far below $70 in the near-term.
President Donald Trump has shown he’s willing to apply pressure on Riyadh when the market gets too hot. It was only after Trump criticized OPEC’s supply cuts that Saudi Arabia began to talk about releasing more oil into the market. The ending or at least the easing of the deal to cut production between OPEC and its allies, which has been in place since January 2017, is expected to be agreed to at the next meeting of the group in Vienna on June 22.
Trump’s fleet thumbs on Twitter has made him a major mover of oil markets. His withdrawal of the United States from the Iran nuclear deal spooked markets, prompting serious supply fears, particularly after the administration vowed to apply the “strongest sanctions in history” on Tehran. But that decision also went over well with Saudi Arabia, which loathes Shiite Iran and fears its hegemonic agenda.
By aligning U.S. foreign policy on Iran with Saudi Arabia – which remains the world’s only real swing producer – President Trump has earned political capital with Crown Prince Mohammed Bin Salman, commonly known as MBD. Trump’s influence with the young crown prince could prove invaluable as Saudi Arabia weighs future oil policy cooperation with its OPEC and non-OPEC partners, including Russia, which is likely less concerned about American interests.
Expect oil markets to be in limbo until the exporter group decides how to proceed on its output-cut pledge on June 22. No matter the outcome, it’s hard to see any dramatic changes in oil markets in the second half of the year. Markets are already well supplied. Prices rose on geopolitical fears of future output disruptions, not because of any real shortage of oil.
Those fears, stemming largely from the political and economic meltdown in Venezuela and the impact of U.S. sanctions on Iran, remain. Just how much additional oil OPEC and its non-OPEC partners will – or can – put on the market is the real question. The agreement between the exporter group and its allies – 21 countries in all – to cut 1.8 million barrels a day was originally set to expire at the end of 2018. That means it may be cut short by, at most, five months.
Source: Forbes