11-04-2016

OPEC’s political agenda and the price of oil

opec

Because we trade ProShares Ultra Bloomberg Crude Oil and ProShares UltraShort Bloomberg Crude Oil as that relates to West Texas Intermediate (WTI), and because the words of OPEC largely influence those prices, the politics surrounding oil is immediately entertaining, and of special interest, to me.

In this case, I’m talking specifically about Saudi Arabia and Iran.

Of course, there’s more going on in the oil space than just what we’re seeing from these two countries, but the price of oil has recently been influenced what Saudi Arabia has said about participating in a production freeze when OPEC meets with Russia on April 17. Their words suggested that they would not participate unless Iran did, too, which raises some questions.

What does Iran really want?

Looking back a few weeks ago, Iran said that it would not participate in a production freeze based on January levels because sanctions were imposed on it back then, and those sanctions have been lifted. Most people would agree, and interestingly, Saudi Arabia did as well, saying that imposing production limits on Iran based on levels that were reduced by sanctions was inappropriate. But that’s not the entire story.

Prior to the imposition of those sanctions, Iran was pumping about two million barrels per day. Initially, Iran said that it wanted to get back to those pre-sanction production levels before considering any caps, and it is that to which Saudi Arabia nodded its head.

However, shortly after that, Iran pushed the envelope and said that it did not want to consider any production caps until it reached a production capacity of four million barrels per day, double what was being produced before the sanctions were imposed, and until last week, we did not hear any material complaints from the oil space, but that all changed when Saudi Arabia spoke.

What Saudi Arabia really wants

When we dig between the lines things start to become clearer.

Saudi Arabia did not seem to have a problem with the two-million-barrels-per-day production, but doubling production is something that Saudi Arabia has a major issue with.

In many ways, what we are seeing in the oil space from OPEC is political. Iran is starting to ramp up production again, and they want to be heard. Pushing the envelope is a great way to do that, and although they are unlikely to get the four million barrels per day that they want, they will almost surely get two million barrels per day and some other acknowledgment from OPEC that might give them leverage when negotiating in the future.

Although Saudi Arabia has said that they will not agree to a production cap unless Iran participates, it is unlikely that they would even agree to a meeting unless they planned on reaching some sort of an accord that included Russia and Iran, so unless the meeting gets canceled, we are expecting a deal.

The bottom line

Politics could also have another unique way of influencing Saudi Arabia to be vocal last week. Oil prices had increased to levels that would allow some oil producers who had successfully reduced their costs to re-engage, but the price of oil only blipped up to those levels and was not sustained. In many ways, Saudi Arabia has wanted oil prices to fall. They want to see bankruptcies in addition to capex spending cuts, and they know they’re on the verge of getting those. The words from Saudi Arabia last week might also have been influenced by their desire to keep U.S. producers at bay.

When the dust settles, after the meeting on April 17, we expect Iran to be capped at just over two million barrels per day, we expect January production cap agreements by Russia, Saudi Arabia, and the rest of OPEC and participating nations, and we are expecting the price of oil to increase beyond recent highs.

Source: MarketWatch

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