Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
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Oil caught in a flood of conflicting news
Ole Hansen
Head of Commodity Strategy
WTI Crude oil, down 10% from its recent peak, must currently absorb a lot of conflicting news. Venezuela's output is in free fall; the US has asked Saudi Arabia and others to raise production; there's a widening discount to Brent and solid demand growth is starting to be questioned. Some of these developments threaten to break the harmony within Opec as the members prepare to meet on June 22.
Although the price of crude oil only began to weaken a couple of weeks ago, increased selling pressure from funds had emerged since April when President Trump for the first time tweeted about oil and accused Opec of keeping the price inflated. Saudi Arabia and Russia, together with Kuwait and the UAE, are currently working on a plan to turn up the taps, primarily at this stage to meet the involuntary collapse in production from Angola and not least, Venezuela.
Five consecutive weeks of selling became six with last week’s selling being the most aggressive seen so far in this current cycle. The combined long in Brent and WTI crude oil was cut by 101,000 lots to 823,000 lots, the biggest one-week reduction since last August and the lowest exposure since September.
Opec has successfully been able to overachieve in keeping its total crude oil production capped around 32.5 million barrels/day, not least due to huge and largely involuntary cuts from Venezuela and Angola. During April compliance with the production cap, according to Bloomberg, reached 166% with the two troubled members contributing 675,000 barrels/day out of Opec's total over achievement of 776,000 barrels/day.
It is these almost 800,000 barrels/day that Saudi Arabia and Russia are now considering replacing by increasing their own production with the help of the Kuwait and the UAE, the only two other countries with spare capacity and the ability to increase.
A mid-term election is looming in the US and with retail gasoline prices back to $3/gal for the first time since 2014 the US administration has quietly asked Saudi Arabia and others for a 1 million barrel/day production increase in order to put a cap on the price.
The calm within Opec that has been driven by the united front to support the price of oil may be about to be broken in Vienna on June 22. US sanctions against Venezuela and soon against Iran have indirectly helped support Opec's quest for higher prices.
With the need to raise production now only benefiting US friends led by Saudi Arabia, a troubled meeting could await the oil ministers and it is to early to come to a foregone conclusion about the outcome.
Later today at 14:30 GMT the EIA will release its weekly update on stocks, production and trade in crude oil and products. Crude oil temporarily received some support yesterday after the API reported a 2 million barrel drop in US crude stocks. Somewhat offsetting this was a 3.7 million barrel rise in gasoline stocks. As usual, production and trade data will also be watched closely in order to gauge the current state of the US oil market.
WTI crude oil's two-week long correction phase has seen it retrace more than half of the February to May rally. Resistance is likely to emerge ahead of $67.20/b while the downside risk will be determined by how much further funds want/need to reduce long exposure.
Next week week sees the release of monthly oil market reports from Opec on June 12 and the EIA on June 13. In its report for May the IEA was the first to make a small downgrade to demand growth citing the negative impact of rising oil prices. Some EM countries, especially those carrying a heavy debt load in dollars, are currently at risk given the combination of a rising dollar funding cost, weaker currencies and rising fuel costs. India, Malaysia, Brazil, Indonesia and several other EM countries have either removed or reduced fuel subsidies during the recent period with low prices.
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