04-02-2019

Is there a ‘Saudi put’ on oil prices? Here’s one analyst’s argument

The Federal Reserve’s dovish about-face earlier this week affirmed some investors’ belief in a “Fed put” on the stock market, but the actions of the world’s largest crude exporter have convinced one energy analyst that a “Saudi put” is now providing a backstop for oil prices.

“The Saudis have not been coy in hiding their intentions as of late despite never explicitly calling for higher prices,” said Ryan Fitzmaurice, energy strategist at Rabobank, in a Friday note.

In real life, a put option gives the holder the right but not the obligation to sell an underlying asset at a set price by a certain time, a potentially valuable hedge if a bullish bet on the asset goes south. The metaphorical Fed put is a reference to the belief held by some traders that the central bank will alter policy or otherwise take action to bolster asset markets in the event of a shock.

When it comes to oil, Saudi Arabia’s energy minister, Khalid al-Falih, has made clear the Kingdom’s goal of reducing global oil supplies below the five-year average, “which is simply another way to say ‘higher prices,’” Fitzmaurice wrote. The minister has also indicated on numerous occasions that the U.S. will bear the brunt of the production cuts agreed to by the Organization of the Petroleum Exporting Countries and its allies late last year.

That’s starting to show up in the data now, Fitzmaurice said (see chart below), with the past week’s Energy Information Administration data showing U.S. imports of Saudi crude plunging to just 442,000 barrels a day — “the lowest level since October of 2017 and a strong indication of what’s to come.”

Even more telling, news reports indicate the Saudis have no desire to step in to help fill any gap in U.S. supplies left by the Venezuela sanctions.

The Trump administration recognized opposition leader Juan Guaido as interim president last month and unveiled sanctions against state-owned oil firm Petróleos de Venezuela SA on Jan. 28. Venezuela exports to the U.S. had already fallen sharply from a peak of 1.1 million barrels a day in 2007 to 506,000 barrels a day by October of last year. The bulk of those barrels go to Gulf Coast refineries, which were already facing tight supplies of similar heavy and sour crude they’re best-suited to process.

Such a “strong response” from the Saudis shouldn’t come as a surprise, Fitzmaurice noted, coming just after the pledge by Saudi Arabia to reduce supplies at the December OPEC-plus meeting. Moreover, the Saudis got “burned” last November when the Trump administration granted last-minute waivers to importers of Iranian crude just after the Saudis and its allies had ramped up production in anticipation of a shortfall as renewed sanctions on Tehran took hold.

Oil tumbled into a bear market last October and extended losses through December, but have bounced back sharply in the new year, with the U.S. benchmark accelerating gains amid the Venezuela turmoil. Nymex West Texas Intermediate crude for March delivery was up more than 2% on Friday after logging an 18.5% rise in January. The global benchmark, Brent crude was up 2.7% Friday after notching a 15% January rise.

That said, the kingdom’s desire for higher oil prices is more about self-interest than spite, Fitzmaurice said, citing the ambitious “Vision 2030” program driven by the now “infamous” deputy crown prince, Mohammed bin Salman, that aims to diversify the economy away from oil. In the shorter term, higher oil prices are simply needed to finance that pivot.

That’s why, Fitzmaurice said, it’s probably “a safe bet that the Saudis will continue to be a strong driving market force and will use all of their available leverage to put a floor under prices.”
Source: MarketWatch

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