This is important–if very, very speculative–if you’re trying to figure out if OPEC will cut production by enough to end the oil bear market when it holds its regular meeting on December 6.
Today Reuters is reporting that Saudi Arabia is extremely angry at U.S. President Donald Trump because it feels betrayed by U.S. exemptions granted to 8 countries, including China, to U.S. sanctions on Iran reimposed on November 4. The exemptions have contributed to a plunge in oil prices that has taken the commodity into a bear market.
In the summer Trump had asked Saudi Arabia to raise oil production to compensate for lower crude exports from Iran after the U.S. reimposed sanctions on that country on November 4. The Saudis quickly agreed and upped production.
But the Saudis did not receive any advance warning from the White House when the United States offered waivers that kept more Iranian oil in the market. Instead of driving Iranian exports to 0, it now looks like the sanctions with those wavers could take only 1 million to 1.5 million of Iran’s 2.8 million barrels a day production off the markets. Iran’s oil exports are expected to drop sharply to about 1 million barrels per day in November from a peak of 2.8 million earlier this year. Thanks to the exemptions, oil market analysts expect to see Iranian exports recover some of that ground in December.
“The Saudis are very angry at Trump. They don’t trust him any more and feel very strongly about a cut. They had no heads-up about the waivers,” said one senior source told Reuters.
The consensus was, as of yesterday, that the Saudis would cut their production by an announced 500,000 barrels in December.
But, the consensus had it, the Saudis would not be cut production further or take the rest of OPEC with it to an organization wide cut without Russian support. And so far, as of yesterday, Russia was talking about raising rather than lowering production in 2019.
But with Saudi-U.S. relations already under stress due to the murder of of Saudi journalist Jamal Khashoggi in the Saudi consulate in Turkey and sanctions announced today by the White House against 17 Saudis accused of involvement in the killing of Khashoggi on October 2, Russia may be rethinking its position. (Speculative thinking alert!!) The Russians have to be interested in the possibility of exploiting any rift in the U.S.-Saudi relationship in order to advance their own position in the Middle East. (Saudi Arabia’s public prosecutor has announced that he was requesting the death penalty for five people suspected of involvement in the killing, so it’s important to consider the possibility that the White House sanctions and the public prosecutor’s action are part of a coordinated attempt to head off efforts in Congress to investigate the role of Crown Prince Mohammed bin Salman, the de factor head of Saudi Arabia, in the murder.)
The Reuters take on al this is that Saudi Arabia is now considering cuts to output by itself and its OPEC and non-OPEC allies to about 1.4 million barrels per day.
Cuts of that size coming out of the December 6 meeting would be unexpected–at least so far–and would temporarily lead to a recovery of oil prices.
How big a recovery would depend on the perceived degree of commitment to the cuts from Russia.
U.S. benchmark West Texas Intermediate climbed a modest 0.55% today to $56.56 Â barrel. International benchmark Brent crude climbed 0.85% to $66.68 as barrel. Today’s gains, small though they were, mean we’ve now seen oil prices gain in the last two sessions.
It’s also important to note that oil managed these limited gains on a day when the U.S. Energy Information Administration reported that U.S. crude inventories had jumped by10.27 million barrels last week.
