Groundwork being laid for next oil crisis
Markets don’t believe Opec’s output plans will work Commodity prices are driven by supply and demand though leavened with sentiment for lengthy periods. There is no risk premium in the oil price. Speculators remain sceptical about Opec and Russia’s commitment to maintain lower oil output levels despite almost perfect discipline over the last two years.
Markets shrug off Venezuela’s crisis even though Venezuelan oil production has fallen 65% since former president Hugo Chavez took power. Much Venezuelan oil is heavy and sour, and must be refined in American refineries. However, Washington now refuses to pay oil revenues to Caracas.
China and Sweden refine smaller volumes yet half of Venezuelan oil sales to China are already allocated to repaying debt. Ideological mismanagement and corruption have degraded Venezuela’s capacity for decades, while workers are not being adequately paid. This makes strikes inevitable. There can be no quick or clean solution to these problems as shown by a recent pumping station fire.
Though Saudi Arabian oil production costs are low, the crown prince continues to spend extravagantly on welfare and weapons, running a $25 per barrel deficit. Saudis need an oil price of $90, and seem determined to raise oil prices by lowering global stocks to 2.75 billion barrels. They are particularly targeting US stocks on which Wall St speculators focus. Expect Opec’s April meeting to extend output cuts. World demand grows at the long-term trend, despite anti-fossil fuel sentiment.
It is hard to substitute liquid fuels in transport and petrochemicals whose demand grows rapidly.
Chinese demand growth has moderated, but Indian consumption surges from a low base. The rising poor want cars and conveniences of modern prosperity.
Meanwhile, Donald Trump seems determined to lower oil prices by any means. Echoing predecessors like Barack Obama, he pressed the US Department of Energy to release an extra 6marrels of crude oil from its strategic petroleum reserve to be delivered next May, when Iranian sanctions will be renewed. However, waivers are likely to be renewed for all major buyers of Iranian oil. Mr Trump conned the Sunni ‘moderates’ into over- producing in anticipation of deeper cuts to Iranian exports last year but the same ruse won’t work again.
If numbers don’t work, maybe bluster will. Last week a Trump tweet targeting Opec crashed the oil price by $1.78. However, most of Trump’s 11 oily tweets since April 2018 missed their target: on average, the oil price rose 19c each time he tweeted against Opec.
As in 2016, sceptical markets doubt that Opec output cuts will succeed. Yet Saudi Arabian oil output has dropped by 800,000 barrels daily.
Three weeks ago energy minister Khalid al-Falih pledged that Saudi Arabian production will be 500,000 barrels below its Opec quota. He also revealed that State oil company Aramco would develop a modern oil
company able to compete anywhere with super-majors like Norway’s Equinor or Brazil’s Petrobras.
This contradicts the crown prince’s official plan to diversify away from oil dependence, confirming that Saudi Arabia remains committed to boosting their domestic capacity.
Fracking worked in the US, since it relied on cheap capital and services rather than chemicals.
US geology is uniquely attractive, the infrastructure already exists, service prices are competitive, and land-owners share in the revenues. Interest rates have been low, and Wall St still funds companies that produce little net cash.
Money generated must be reinvested to maintain production. The ranchers and wildcatters profited, but those buying them took writeoffs. Fracking is a miracle which cut emissions by killing coal, but its underlying economics remain fragile.
The industry is out of favour with investors. Speculators flee exploration for crypto-currency and cannabis stocks. Stockmarkets value oil stocks at around $27 when forward prices are more than twice as high.
