Bullish Oil Signals Proliferate as OPEC Cuts Get Even Deeper

(Bloomberg) -- Crude has surged to a three-year high, the stockpile surplus is all but gone and OPEC’s choke-hold on its own production is only getting tighter. As oil ministers gather in Saudi Arabia, the $80 a barrel the kingdom desires is inching closer.

“The petro-nations seem willing to over-tighten the market, with the current price levels fostering confidence in their supply deal,” Norbert Ruecker, head of macro and commodity research at Julius Baer, said in a note. The political noise over Syria and Iran “fuels the exceptionally bullish market mood.”

Energy ministers from Russia, Saudi Arabia and other major oil producers are meeting in Jeddah on Friday. They won’t make any binding decisions, but will give a strong signal of their intentions after more than a year of production cuts and rising prices. Based on recent market data, they would have some justification in declaring victory and phasing out their supply deal, but all indications are that they’ll keep on going at least until the end of 2018.

For a detailed breakdown of the oil market’s bullish indicators, click here.

While soaring U.S. shale production remains a nagging concern, the key players appear to be more fixated on the immediate benefits of high crude prices. Saudi Arabia needs to cover weighty domestic spending and attract investors to a partial sale of its state oil company, Aramco. Russia is relishing its new role as a major Middle East power broker, while also enjoying bigger financial gains than anyone from the accord.

Total Wipeout

Preparatory discussions in Jeddah on Thursday between officials from the Organization of Petroleum Exporting Countries and non-OPEC nations concluded that oil stockpiles are almost back in line with the five-year average -- the key goal of the cuts -- according to people with knowledge of the data. The surplus was just 10 million barrels at the end of March, down from 340 million at the start of 2017, one of the people said.

In the U.S., the world’s largest oil consumer, inventories of crude and refined products have already slipped below the five-year average, going into deficit for the first time since 2014, according to data from the Energy Information Administration. That’s happened toward the end of what is typically a seasonal lull in the nation’s fuel demand, before drivers start jumping in their cars next month for summer vacations.

The preliminary assessment from the committee meeting in Saudi Arabia on Thursday was that OPEC and its allies cut 45 percent to 50 percent deeper than the agreed 1.8 million barrels a day in March, said people familiar with the matter. That’s the biggest reduction ever from the group of 24 nations and compares with 38 percent over-compliance in February.

Involuntary Cuts

Much of those additional reductions weren’t intentional, according to the International Energy Agency. An economic crisis and “chronic mismanagement” dragged Venezuela’s output to a multi-decade low, while Angola lost production from aging fields. Others were temporary, such as field maintenance in Algeria.

Brent crude rose as high as $74.75 a barrel on Thursday, the highest since November 2014. The international benchmark traded at $73.76 as of 5:43 a.m. in London, poised for its second weekly gain. Yet for all the signs of a significantly tighter market, ministers in Jeddah gave no indication they would ease off their cuts.

“I don’t think it’s mission accomplished,” Oman’s Oil Minister Mohammed Al Rumhi told reporters in Jeddah. “We have made progress but I don’t think the job is finished.”

Going Deeper

OPEC’s supply reduction may keep getting deeper due to Venezuela’s worsening economic crisis and the growing likelihood that U.S. President Donald Trump will reimpose sanctions on Iran.

The situation in Venezuela is “disastrous,” with output slumping due to a lack of workers and investment, Total SA Chief Executive Officer Patrick Pouyanne said in Paris on Thursday. While analysts surveyed by Bloomberg said it was too close to call whether Trump will tear up the Iran nuclear deal, they said such a decision could remove about 500,000 barrels a day from the market.

Don’t count on Saudi Arabia to step in to offset such losses, as it did during the Libyan civil war in 2011, said Commerzbank analyst Carsten Fritsch.

“Saudi Arabia is intentionally keeping the supply of oil tight and not countering the sizable production outages in Venezuela,” Fritsch said in a note. “No departure from current production policy can be expected.”

©2018 Bloomberg L.P.

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