A month after President Donald Trump announced that the United States was withdrawing from the Iran nuclear deal and re-imposing sanctions on Tehran’s oil, Iran’s archrival and OPEC’s de facto leader Saudi Arabia got in June its Arab Gulf fellow cartel members and OPEC+ deal partner Russia on board to start pumping more oil to offset the expected loss of Iranian supply.
Just five months later, Saudi Arabia and OPEC are hinting at a fresh oil production cut, as rising production and signs of waning demand growth point to oversupply next year.
The oil market and analysts—who were questioning just two months ago the Saudi and Russian ability to offset expected steep Iranian losses—are now thinking that OPEC and its allies reacted too early to come to the rescue of global oil supply.
Analysts say that President Trump, intentionally or not, ‘duped’ the Saudis into overproducing to compensate for what was expected to surely be more than 1 million bpd and even close to 2 million bpd loss from Iran.
The Saudis and Russia actually never said that they were compensating for Iran—their goal, as always, was to ensure ‘market stability’, OPEC’s favorite buzzword.
All through the summer and early fall, the United States was hinting that this time around sanctions will be more severe than during the Obama administration and that the goal was to have Iranian oil exports down to ‘zero.’
In reality, few thought that Iran’s exports would be zero at the start of November, but the oil market and analysts started to fear that the Iranian loss would be much more than anticipated earlier. As a result, the market welcomed the rising production from Saudi Arabia and Russia, and even questioned whether that would be enough.
Oil prices jumped to four-year highs, with Brent Crude hitting $86 in early October, a month before the U.S. sanctions on Iran snapped back.
But those higher oil prices started to weigh on the crude import bill of many emerging markets, especially the world’s third-largest oil importer India, aggravated by sliding local currencies against the U.S. dollar.
Add to this the escalating U.S.-China trade war, which started to weigh on global economic and oil demand growth prospects, and the fear of a supply crunch flipped into fear of waning demand. In just two months, the key question among market participants and analysts also flipped from ‘are they pumping enough’ to ‘aren’t they overproducing’.
Then came the start of the U.S. sanctions on Iran, and with it, waivers to eight Iranian oil customers—including the biggest buyers China and India—due to the specific countries’ circumstances and to ensure a well-supplied oil market, as U.S. Secretary of State Mike Pompeo said.
The sanctions on Iran and the U.S. waivers came on the eve of the U.S. midterm elections. President Trump saw U.S. gasoline prices drop to a six-month low the week before the elections. As analysts say, few things really terrify an American president more than surging fuel prices.
According to analysts who spoke to CNBC, the Saudis were tricked into pumping more in expectation of severe Iranian losses and a determined U.S. stance on waivers and bringing Iran’s exports to zero.
Iran’s exports are down, by around 1 million bpd from May, but some 1.2 million bpd-1.5 million bpd is probably still out there flowing to Tehran’s customers—compared to estimates that 1.5 million bpd and even 2 million bpd of exports would be choked off.
The Saudis were duped into boosting oil production, Matt Smith, head of commodities research at ClipperData, told CNBC.
“They’ve really done a good job of decreasing that oil price, but it has been at the expense of some of those relations there, because surely the Saudis have got to be pretty unhappy with the way things have played out here,” Smith said.
The Saudis are now hinting of another U-turn—a new cut next year. Saudi Energy Minister Khalid al-Falih reiterated that “we need to do whatever it takes to balance the market,” but Russia is reportedly reluctant to join another collective reduction in supply.
President Trump is not hinting anything at all—he said prices should be even lower in his latest tweet aimed at OPEC this week—“Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!”
The next full OPEC meeting at which production policy decisions could be taken is taking place in the first week of December. We’re in for an interesting two and a half weeks of rumors, leaks, hints, and comments from Saudi Arabia and Russia, and probably from President Trump.
By Tsvetana Paraskova for Oilprice.com
