Oil will not flow freely and Middle East risk is rising

SEB - Prognoser på råvaror - Commodity

Brent crude gained 2.3% last week with a close of $72.2/bl countering negative headwinds from both USD strength (Dollar index +0.7%) and losses in global equities (-0.8%). Sabotage and attacks on four VLCCs near the Straight of Hurmuz where 17 m barrels of crude oil is flowing into the global market every day was the main oil bull driver last week. This morning Brent crude is gaining 1.3% to $73.1/bl with Saudi Arabia signalling over the weekend that they want continued supply cuts by OPEC+ also in 2H-19 with Russia ready to comply with what is agreed in June 25/26 in Vienna.

The message from Saudi Arabia’s energy minister Khalid al-Falih as we read it:

  1. OPEC+ (led by Saudi) will control supply of oil to the market also in 2H-19
  2. OPEC+ will not repeat the mistake from 2H-18 with freely flowing oil to market
  3. Downside price risk “$50/bl” in H2-19 is off the table if Saudi gets its way

Most likely Saudi Arabia will get its way in June. Not necessarily deeper cuts, but supply will be controlled. It will not flow freely as it did from May to Nov in 2018.

So Saudi takes the downside price risk off the table which means sideways prices or higher if shit hits the fan in the Middle East.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

In the weekend’s meeting we think Saudi Arabia’s Khalid al-Falih tried to drum home the message that the oil market is not all that short of oil and that supply-control is needed in 2H-19 unless they want to risk a 2H-18 repeat. The oil-pain from last autumn will likely ensure a successful meeting when OPEC+ meets in Vienna on June 25/26.

News this weekend: Exxon Mobile is evacuating 80 workers from Iraq (Blbrg link: PRR0GI6KLVR4). We find this disturbing because if there is a real and rapidly rising risk of escalation spiralling out of the Iran situation and the Persian Gulf then one might think that US oil companies might be the first to know intelligence wise and thus be the first to pull out. As of yet no other international oil companies have signalled that they will pull out of Iraq.

Ch1: Oil production Iran, Venezuela and the US in 1,000 bl/d. Make way for US oil. Who’s next? Iraq?

Oil production Iran, Venezuela and the US in 1,000 bl/d

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