Trump tweets miss their mark
The second OPEC-related tweet from the US president this year doesn’t seem to have had the desired effect of cooling prices.
The US WTI oil benchmark passed the significant $60 per barrel barrier for the first time this year, while Brent crude also hit a new high of $68.39 per barrel.
Speculation about Saudi Arabia and the Organization of the Petroleum Exporting Countries working toward the goal of lifting the price for Brent crude to $70 per barrel appears to have no real basis or sources to back it up.
Saudi Arabia and OPEC never targeted a particular price and, indeed, the price of oil can only be determined by market forces such as supply, demand and the rate at which reserves are used up by major consuming nations.
President Donald Trump’s second tweet this year and the 12th since he started sending messages to OPEC last year, urges the organization to boost oil supply whenever prices start to tick higher.
The US leader delivered his message while OPEC output dropped to its lowest level since March 2015.
As oil supplies in OECD economies drain, this sets the scene for a supply deficit in the second quarter of 2019.
The group has done well to keep the market in balance and prevent the build-up of excess inventories.
Despite the fact that the current low price does not reflect the extremely tight market, it is nonetheless keeping crude oil benchmarks in what is known in the industry as “backwardation” — when the spot or immediate price of oil is higher than its future price.
S&P Global Platts notes that the US president’s previous tweets have triggered sharp same-day price drops. But so far this year, such downward price movements have been short-lived.
Price volatility also seems to be flattening out somewhat from the erratic movements that characterised the market toward the end of last year.
That is significant when one considers the recent surge in US shale output that took total output in the world’s largest economy to 12 million bpd.
Despite the increase in shale oil being pumped, the market is constrained by the capacity of pipelines to transport it elsewhere.
But that will soon change with an extra 2.6 million bpd of pipeline capacity coming online in 2019 and early 2020, which will ease US export constraints.
Refined product inventories are draining from solid demand amid large refinery shutdowns during the maintenance season which is coming to an end.
As oil supplies in OECD economies continue to drain, this sets the scene for a supply deficit in the second quarter of 2019 when refining capacities increase.
Strong supply growth from the US is needed by the market to offset rising demand and keep the market in balance.
Finally, another ingredient to add to the mix is the ongoing downward supply pressure from Venezuela’s economic crisis and US sanctions.
- Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him onTwitter: @faisalmrza
As oil supplies in OECD economies drain, this sets the scene for a supply deficit in the second quarter of 2019