Saudi energy minister says world does not need any more oil in coming months

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Saudi energy minister says world does not need any more oil in coming months

 

Supply risks abound from Iran to Venezuela to Libya and the peak summer oil demand season is just around the corner, but Saudi energy minister Khalid al-Falih still sees a world awash in crude.

 

 

In case anyone doubted Saudi Arabia's resolve to maintain price-boosting production discipline, when many forecasters are warning of a potential supply squeeze ahead and US President Donald Trump is pressuring the kingdom to open the taps, Falih could not have been more clear Sunday.

"We see inventories rising, we see plentiful supplies," the minister told reporters in Jeddah, Saudi Arabia, where an OPEC/non-OPEC monitoring committee that he co-chairs with Russian counterpart Alexander Novak met to debate how much to pump going forward. "All in all we should be in a comfortable situation in the weeks to months to come," Falih added.

So comfortable, in fact, that he said the OPEC kingpin will keep its crude production in May and June at around 9.7 million to 9.8 million b/d. That is more than half a million b/d below its quota under an OPEC/non-OPEC supply accord of 10.31 million b/d. Saudi crude exports would not surpass 7 million b/d in either month, he added.

Even if the deal is not extended beyond its June expiry when the producer coalition meets in five weeks in Vienna, the minister declared that Saudi Arabia will still hold to its quota for at least an extra month -- boldly risking its own market share in the name of price support.

"We are not going to deviate from our target for July," Falih said. "I hope my other colleagues will do the same."

The prospects of rolling over the production cuts are not yet clear. Several ministers at the monitoring committee meeting said they supported in principle a continuation of the supply agreement, but the group as a whole was not ready to be locked into a commitment just yet.

Changing market dynamics may necessitate some kind of amendment to the deal, such as loosening some quotas and adjusting the level of cuts, some delegates said.

Novak said geopolitical uncertainties, including the US enforcement of sanctions on Iran and Venezuela, complicate the OPEC/non-OPEC coalition's ability to stabilize the oil market, while the demand outlook is clouded by trade disputes and slowing economic growth.

"We need to remain flexible," he said after the committee meeting. "We are trying to base that decision on what's best for the market and do the right thing to keep it balanced."

Non-OPEC Russia has been less eager than Saudi Arabia to pledge further cuts, though President Vladimir Putin has said he sees political benefits to continuing engagement with OPEC.

Based on the steep backwardation in Brent prices, the oil market appears to be anticipating an increasingly tight physical market due to the US crackdown on Iranian crude exports through sanctions and Venezuela's continued economic collapse.

Libya's instability also presents a supply risk, with Mustafa Sanalla, the chairman of the country's state-owned oil company, saying Saturday that warring factions are putting some 95% of its production at risk.

Front-month Brent futures have risen more than a third since the beginning of the year, but Falih dismissed the market structure as not grounded in reality and said that prices had greater downside risk than upside.

"We're not fooled by current prices," he said. "We think the market has been fragile."

Even US sanctions on Iran have not clamped down on Iranian oil exports as much as believed, he said. Iran has said it will try to sell barrels on the so-called "gray market" to try to avoid US detection, through clandestine shipments and third-party sales.

"I think there is a lot of oil that is leaving the shores of Iran or the borders of Iran that is not accounted as Iranian oil," Falih said. "It's presented in the markets, and therefore we are not seeing as much demand for other crudes as many analysts are expecting."

What Falih said he is laser focused on is tackling the global oil inventory glut.

Oil stocks have risen some 65 million to 70 million barrels since last July, he said, though much of that is due to Saudi Arabia raising its production under pressure from the US to keep the market well-supplied in advance of the reimposition of Iran sanctions in November.

Saudi crude production reached a record high above 11 million b/d that month. Sanctions waivers the US granted to eight countries to continue purchasing Iranian oil for six months wrong-footed the Saudis and caused a severe downturn in the market.

Once bitten and twice shy, Saudi Arabia will not raise output again without evidence that global demand warrants the extra barrels -- but Falih said that surge should provide ample evidence that Saudi Arabia can rise to the occasion if a supply shortage does materialize.

However, the kingdom may not want to risk a further rift in OPEC by producing beyond its quota, with geopolitical tensions with Iran already high in the wake of last week's drone attack on a major Saudi pipeline that officials have blamed on Iranian-backed Yemeni Houthis. Iran, which did not send a representative to the committee meeting in Jeddah, has warned other countries not to encroach on its sanctions-hit market share.

"We want to bring inventories down to a more normal levels," Falih said. "We need to stay the course and do that in the weeks and months to come."

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Physical Oil Traders Are Desperate for Crude

From Colombia to the North Sea, the Middle East to Texas, the global market for crude cargoes is becoming tighter by the week as supplies grow more constrained and risks to production spiral.

Prices for actual barrels from the North Sea, Asia, and the Americas are now trading at the highest in half a decade. Key price spreads that show how urgently oil refineries need benchmark Brent barrels are soaring.

It’s little wonder. The list of known supply curbs and disruptions is growing, and traders are now also having to contend with mounting tensions in the Persian Gulf–the world’s largest export region. On Tuesday, drones attacked and temporarily halted a giant Saudi Arabian pipeline. Two days before that, four oil tankers were sabotaged at the key refueling port of Fujairah in the U.A.E.

“We have now reached the stage where crude differentials globally and across all slates are strong,’’ said Greg Newman, co-CEO of Onyx Commodities, which specializes in energy derivatives. “There is only one conclusion: the prompt market is short of oil. With the current situation, the outright price should continue to strengthen until demand suffers.”

Brent crude futures for July are now trading close to $3.40 a barrel more than for December, the highest premium in the life of those two contracts, according to ICE Futures Europe data. That means traders are willing to pay more to obtain supplies as soon as possible.

That same strength is also showing up in North Sea derivatives markets. Contracts for difference have been trading in a backwardated structure — meaning more immediate prices are higher — that has strengthened markedly over the past two weeks, according to PVM Oil Associates data. The Dated to Frontline swap, or DFL, contract settled at its strongest since 2014 on a rolling basis, according to Bloomberg fair value data.

It’s the same picture in the markets where traders are buying physical supplies.

In the North Sea, Petroineos — the trading and refining venture between PetroChina Co. and Ineos Group — was willing to pay a $1.20 a barrel premium to a benchmark to buy Forties crude on Thursday, according to traders and brokers monitoring a pricing window run by S&P Global Platts. Nobody was willing to sell at that level. The grade hasn’t traded that strongly since January 2014, data compiled by Bloomberg show.

In the U.S., Heavy Louisiana Sweet crude rose to the highest since 2014 this week. HLS is now the most expensive crude in the Gulf Coast complex. Buyers in America are seeking to substitute the loss of sanctions-hit Venezuelan supply and production curtailments from Canada.

Meanwhile, West Texas Intermediate crude prices in Houston, a critical indicator of export demand, trades at $7.50 a barrel above benchmark WTI crude, after reaching a nearly three-month high on Wednesday. Colombia’s Vasconia crude recently traded at a 5-year high.

One place where that strength isn’t showing up is at Cushing, the U.S. trading hub for WTI. Inventories there have increased for the past four weeks as shale production swells and the ability to get supplies out of storage tanks remains constrained. Traders in the U.S. have also been gearing up for further stockbuilds ahead, with key timespreads weakening for the rest of 2019 in recent days.

But in Asia, a tender for Al-Shaheen crude was awarded at an average of about $3.25 a barrel premium to Dubai benchmark price this week. Traders say that’s highest since at least 2013. Oman crude futures are still more than $3 a barrel above Dubai swaps while all Middle Eastern barrels — as well as Russian grades like Sokol — are trading strongly.

One question some traders are asking is whether the headline price of oil — the front-month futures contract — reflects this strength.

While futures in New York has gained almost 40% this year, and close to that in London, both benchmarks remain several dollars a barrel below their 2019 peak, set in late April.

However, at least in the case of Brent contracts that reflect international trading, underlying price indicators for physical barrels continue to look bullish.

“The steep backwardation in Brent and Dubai curves and the strength in physical differentials globally, particularly for sour crudes, point to one of the tightest physical markets since at least 2011,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London.

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OPEC Signals Intention to Limit Supply All Year

 

Saudi Arabia and other key producers in OPEC signaled their intention to keep oil supplies constrained for the rest of the year, while pledging to prevent any genuine shortages.

It was less clear how far Russia, their main partner in the wider OPEC+ producers’ coalition, shared that view. While most nations at a meeting in the kingdom on Sunday supported extending production cuts to the end of the year, Russian Energy Minister Alexander Novak talked about potentially relaxing the curbs and wanted to wait and see what happens in the next month.

“We need to stay the course, and do that for the weeks and months to come,” Saudi Energy Minister Khalid Al-Falih told reporters after the meeting in Jeddah. The kingdom “isn’t fooled” by crude prices, currently above $70 a barrel in London, and believes the market is still fragile.

The contrasting messages underscore the uncertainty in the global market. If ministers don’t agree to an extension next month, the production cuts that ended the worst oil-industry downturn in a generation will expire. Yet their decision is clouded by the impact of U.S. sanctions on Iran and the risk to demand from President Donald Trump’s trade war with China.

In a market where the preponderance of risks are on the supply side -- with Venezuela and Libya also facing disruptions -- what Saudi Arabia chooses to do with its ample spare production capacity may be the market’s deciding factor in the coming months.

The kingdom has so far been trying to strike a balance between its own need for higher revenues to fund government spending, and pleasing Trump by filling any supply gap created by his moves against Iran. On Sunday, Al-Falih gave a strong indication that prices were the priority and he wasn’t about to open the taps.

Saudi Freeze

“My recommendation to my colleagues will be to drive inventories down gently” by extending the current cuts into the second half, Al-Falih said. He acknowledged consumers’ concerns about potential supply disruptions and promised to make sure “no refinery, no customer is left without their requirement of crude oil.”

Continuing the OPEC+ accord into the second half wouldn’t rule out a production increase. Saudi Arabia has been cutting far deeper than required under the deal and could boost output by about 500,000 barrels a day -- equivalent to almost half Iran’s exports -- without breaching its limit.

Yet Al-Falih said production in May and June will be held at the current level of 9.8 million barrels a day. Regardless of what OPEC+ decides next month, output in July won’t exceed the kingdom’s limit in the deal of 10.3 million barrels a day, he said.

It’s unclear how much Iran is exporting, and so far demand for replacement crude from Tehran’s customers has been lower than expected, Al-Falih said.

Extension Support

The meeting of the Joint Ministerial Monitoring Committee, which oversees the deal between the Organization of Petroleum Exporting Countries and its allies, was generally supportive of an extension, and nobody rejected the idea, Nigerian Oil Minister Emmanuel Ibe Kachikwu said in a Bloomberg television interview.

Even so, the committee didn’t make a formal recommendation to prolong the supply curbs, concluding instead that further monitoring of the market was necessary, with a focus on managing inventories and keeping supply and demand in balance.

The fate of the group’s production cuts, which amounted to about 2 percent of global supply last month, will be decided on June 25 to 26 in Vienna, just days before they expire. That’s a volatile situation for the oil market, giving traders very little time to adjust if there’s an unexpected shift in policy.

Russian Reticence

Russia’s Novak affirmed his commitment to the historic alliance, saying the production cuts have “proved very efficient.” That counts as high praise from the taciturn official, but before and after the meeting he also spoke of the possibility of relaxing the cuts.

“We need to promptly react to the situation now and potential developments in the second half,” Novak said before the meeting. “If the demand grows, if a deficit is there, we are ready to consider a relaxation of the current parameters, partial output recovery.”

Extending the deal is also on the table, and Russia would comply with any agreed output limit in the second half of 2019, Novak said.

All members are keen to avoid a repeat of last year when the group -- faced with very similar circumstances in Iran -- boosted output too fast and triggered a fourth-quarter price slump. Other ministers in Jeddah, including those from Oman and the United Arab Emirates, also said the group should stay the course.

“The job is not complete,” U.A.E. Energy Minister Suhail Al Mazrouei told reporters on Saturday. “We are still seeing some inventory buildup and we need to attend to it.”

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Oil Jumps as OPEC Signals Continued Cuts

 

 

 

Oil Jumps as OPEC Signals Continued Cuts

by  Bloomberg

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Tsuyoshi Inajima

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Monday, May 20, 2019

 

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Oil started the week strongly after Saudi Arabia and other OPEC+ members signaled intentions to keep supplies limited.

 

(Bloomberg) -- Oil started the week strongly after Saudi Arabia and other OPEC+ members signaled intentions to keep supplies constrained for the rest of the year, while U.S. tensions with Iran ratcheted up as President Donald Trump threatened the country in a tweet.

Futures in New York rose as much as 1.7%, following a 1.8% gain last week. Saudi energy minister Khalid Al-Falih urged members of the alliance meeting in Jeddah to “stay the course” on output cuts. Meanwhile, just weeks after the U.S. increased sanctions pressure on Iranian crude exports, Trump tweeted “If Iran wants to fight, that will be the official end of Iran.”

Oil has rallied about 40% this year as supply cuts have outweighed concerns about slowing demand growth caused by trade tensions between the U.S. and China. Saudi Arabia and fellow oil producers have to balance their desire to maintain high crude prices with the need to fill any supply gaps caused by rising geopolitical risks in the Middle East and disruptions in Venezuela, Libya and Iran.

“Crude prices are rising because investors view OPEC wants to tighten supply and demand to maintain current prices,” Takayuki Nogami, the chief economist at Japan Oil, Gas and Metals National Corp. in Tokyo., said by phone. “While the outcome of the OPEC+ meeting was in line with expectations, it’s still uncertain” what the producers will ultimately decide on production cuts in June, Nogami said.

West Texas Intermediate crude for June delivery rose as much as $1.05 to $63.81 a barrel on the New York Mercantile Exchange and traded at $63.53 at 3:04 p.m. in Singapore. The contract added 1.8% last week, the biggest weekly increase since early April. The contract expires after end of trading Tuesday. The more actively traded July contract rose to as high as $63.96.

Brent for July settlement rose 97 cents to $73.18 a barrel on the London-based ICE Futures Europe exchange. The contract added 2.3% last week. The global crude benchmark traded at a $9.44 premium to WTI for the same month.

Prices for prompt shipments of oil will remain significantly higher than later deliveries in what’s known as a steep backwardation, so long as global oil inventories fall in the summer and core OPEC producers continue to withhold extra supplies, Morgan Stanley analysts including Martijn Rats said Monday in an emailed note.

“We need to stay the course, and do that for the weeks and months to come,” Saudi Arabia’s Al-Falih told reporters after the meeting in Jeddah. The kingdom “isn’t fooled” by crude prices and believes the market is still fragile.

Meanwhile, Russian Energy Minister Alexander Novak sent mixed signals. Russia, the most important non-OPEC partner in the coalition, is ready to consider easing production cuts if the market needs more crude, Novak said. Still, Russia would comply with any agreed output limit in the second half of 2019, he said.

In the U.S., working oil rigs fell by three to 802 last week, the lowest since March 2018, according to data released Friday by oilfield-services provider Baker Hughes. Government data last week showed U.S. crude production dropped for the second week to 12.1 million barrels a day.