Head of Commodity Strategy, Saxo Bank Group
Summary: Next weekend's G20 meeting in Buenos Aires will be a virtual sideshow to the main events – the crunch meeting of presidents Trump and Xi and also that between Putin and the Saudi crown prince. These smaller meetings may determine the state of the oil market for months to come.
Eight weeks of constant selling has seen WTI crude oil return to $50/b and in the process surrendering half of the gains that were achieved since the February 2016 low some 33 months ago. The reason behind the selling is well known so more importantly is what happens next.
Saudi Arabia, with support from Russia and its GCC friends, agrees to cut production by somewhere between 1 and 1.5mbd. This would further be supported should the US and China find some common ground on trade when they meet on Saturday at the G20 summit in Buenos Aires.
Global refinery activity is about to step up a gear following maintenance. On a global level this could increase oil demand by somewhere between 1.5 and 2mbd. In the US a pick up in refinery demand has already been seen but record production has so far prevented crude stocks from falling.
These developments have left the Kingdom weak in the eyes of the wold and dependent on support from President Trump. A dependency which has come at a price, namely the promise to pump. Just like the rest of the oil market, Saudi Arabia was blindsided by the US decision to allow eight countries to continue buy oil from Iran after the reintroduction of sanctions in early November. This decision, combined with the increase in production, left the market with nowhere to go but down and fast.
The renewed weakness today came after Russian president Putin, while praising the Saudi Crown Prince for the success of the Opec+ agreement, also said that Russia was “absolutely fine” with oil prices around $60/b. Russia has due to its three-year average rule based its 2019 budget on an oil price around $43/b while Saudi Arabia is in need of a price closer to $90/b to meet its budgetary requirements. This weekend Putin will hold talks with the crown prince in Buenos Aires and the market will be looking for signs that they will do a repeat of the G20 meeting in September 2016 which laid the foundation for the Opec+ agreement to cut production.
First up, however, we have the Weekly Petroleum Status Report from the US Energy Information Administration (EIA) at the usual time of 15:30 GMT. A tenth consecutive and counter-seasonal rise in crude oil stocks was reported by the American Petroleum Institute last night. But instead of weakening further the market took some comfort from a 2.6 million barrel drop in gasoline stocks before trading lower in response to the above mentioned comments from Putin about oil at $60/b.
The result and immediate reaction to the EIA report will be posted on my twitter feed @ole_s_hansen.