Saudi Arabia seeks stable, not soaring, oil prices

Oil prices rose this week on continuing market tightness. With the price rise, some Saudi-bashing has begun. (Reuters)
Updated 22 September 2018

Saudi Arabia seeks stable, not soaring, oil prices

  • Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday.
  • The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98

RIYADH: Oil prices rose this week on continuing market tightness. With the price rise, some Saudi-bashing has begun. Bloomberg reported that increasing prices were due to Saudi Arabia’s comfort with Brent crude above $80 per barrel. Such “analysis” is hogwash.

Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday. WTI rose above $70 per barrel for the first time in three months and settled at $70.78 per barrel by the week closing.
The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98. As may be noted in those numbers, the Brent crude price has been resisting the psychological barrier of $80 per barrel. The fact is that, since October 2014, the Brent monthly average has never gone above $80.
The oil price outlook might be raised as a result of this upward tendency and the continuing tight oil market. For instance, with the latest numbers in hand, HSBC has revised its oil price forecast upward with Brent to average $80 per barrel in 2019 and $85 in 2020, before settling at about $75 in 2021.
Bloomberg was inaccurate about Saudi Arabia’s comfort with a Brent price above $80 per barrel. The Kingdom has never been among the bulls when it comes to oil prices. Again and again, Saudi Arabia has been a major advocate for stable oil prices, not increasing oil prices, which it views as unsustainable and damaging to the global economy. Bloomberg is also predicting that Saudi Arabia will follow its allegedly bullish nature and refrain from ramping up production to compensate for the oil lost once the US sanctions on Iran come into effect.
US Secretary of Energy Rick Perry has confirmed that Saudi Arabia, Russia and the US are well able to add enough crude oil supply into the market to compensate for Iran. Indeed, the Kingdom has begun to increase output to adjust for market needs, from 9.87 million barrels per day (bpd) in April to 10.42 million bpd in August.
The upward movement in oil prices came after strong fundamentals showed market tightness that spurred record levels of speculative traders, with nearly all betting on higher prices. The price rise also recognized that total US inventories are below the five-year average for the first time since May 2014. Oil prices have been gradually trending upward with gentle fluctuations. There have not been any steep surges or declines. There is nothing artificial about the trend. In reality, it is boringly predictable.
Last month, the International Energy Agency (IEA) reported OECD commercial crude oil inventories at 32 million barrels below the five-year average. Stocks at the end of Q2 2018 were up 6.6 million barrels versus the end of 1Q 2018, the first quarterly increase since 1Q 2017. The IEA also noted that global refinery throughputs in the second half of 2018 are expected to be 2 million barrels higher than in the first half of the year. These refined products stocks will draw down before building again in 4Q 2018.
Global crude oil inventories peaked in 2016. The OPEC+ agreement that worked for market balance was the reason for a fall in inventories. Since May 2017, global oil stocks have been on the decline and now global crude oil stocks are below the five-year average. Product stocks are also below that level, with strong demand and healthy refining margins.
Inventories have kept falling despite American producers pumping at all-time highs last month. It is only the massive flood of oil from the US which has kept crude oil prices at low levels from early 2015 to the end of 2017 — along with a resulting lack of upstream investment in the oil industry. Therefore, the IEA predicts that in 2022 spare production capacity will fall to a 14-year low.
Global oil markets are rebalancing. Oil prices started their upward momentum from the end of October 2017. They went above the psychological barrier $60 a barrel after 10 consecutive months of tireless efforts by OPEC and non-OPEC nations that started on January 2017. The market rebalancing will continue through the end of 2018, and beyond.
Such upward momentum in oil prices isn’t artificial movement because it came after many months without steep price fluctuations. In 2016, the Brent price average was $43. The 2017 Brent price average was $54, and prices just surpassed $60 in October 2017. The Brent average surpassed $70 in late March 2018 and has been hovering between $72 and $78 since. There is no evidence of a steep fluctuation or an artificial movement.
The claims of an artificial price movement have come just at the time when OPEC and the world are reaping the positive outcomes of 24 nations collaborating in output cuts that managed to successfully rebalance the oil market in a situation where global oil inventories were running at record highs. Also, these false claims came when the oil industry needs capital inflows to reactivate upstream investments for major international oil companies. Such investments are essential for the price stability that benefits oil producers and consumers globally. Low oil prices result in low investment in discovery and production of petroleum resources, which damages various industry sectors and energy needs. That leads to a vicious cycle of up-and-down price fluctuations.


‘The stock market, stupid’ — Trump’s claim is looking hollow 

Updated 29 October 2020

‘The stock market, stupid’ — Trump’s claim is looking hollow 

  • The timing of the Wall Street downturn is the worst possible for the incumbent, who has declared every new peak in the S&P as a personal victory throughout his presidency
  • The likes of Apple, Amazon, Alphabet and Facebook are due to declare their earnings for the third quarter, and how those numbers are received could give the indices a boost

Before the US election of 1992, candidate Bill Clinton summed up what he saw as the reason he would become president: “It’s the economy, stupid.” He was proved right as voters disowned the economic policies of President George H.W. Bush in their droves to elect Clinton. 

Until the COVID-19 pandemic began to ravage the US economy in March, President Donald Trump would have been able to make the same claim. For the four years of his presidency, the US economy had continued the progress initiated by his predecessor to recover from the 2009 global financial crisis.

By most measures — growth, employment, inflation — the Trump years had been good, and those on the top of the pile had even more reason to be grateful thanks to the big tax cuts he had made a flagship policy.

The pandemic changed all that in the space of a few weeks as lockdown measures shocked the economy. Jobless claims soared to all-time records, bankruptcies and closures affected large swathes of American business, and gross domestic product collapsed. The International Monetary Fund forecasts that the American economy will shrink by 4.3 percent this year.

But Trump could still claim instead that “it’s the stock market, stupid” as a reason he could be re-elected. Mainly because of the trillions of dollars injected into the economy in the form of fiscal stimulus, US share indices had swum against the economic tide.

The S&P 500 index hit an all-time high in September, allowing Trump to boast that under his administration, investors and the millions of people whose livelihoods depended on the financial industry had never had it so good.

Now, it looks as though even that final claim is looking more fragile. For the past couple of days, US and European stock markets have gone into reverse as investors took fright at the rising number of COVID-19 cases and the re-imposition of economic lockdowns in many countries.

Trump might argue, with a little justification, that Wall Street is worried about the prospect of Joe Biden being elected president by the end of next week. Certainly the contender, by definition, is something of an unknown quantity in terms of economic policy.

He is also known to favor some policies — such as tighter regulation on environmental sectors, more spending on health care, and higher taxes for federal services and projects — that have traditionally been regarded as contrary to the philosophy of “free market” America.

In particular, the energy industry is worried about possible restrictions on shale oil and gas production that Biden and his “green” team are believed to favor. However, it should be pointed out that the Democratic candidate has specifically said he will not ban shale fracking, as some environmentalists want.

In any interesting side-story, the state of Texas — one of the biggest in terms of electoral college votes — would seem to have more to lose than any other if the energy scare stories about Biden were true. Yet the contest there between Democrats and Republicans is the closest it has been for decades, according to opinion polls.

The timing of the Wall Street downturn is the worst possible for the incumbent, who has declared every new peak in the S&P as a personal victory throughout his presidency and a sign of his deal-doing prowess. If even this claim is denied to him in the final week of campaigning, it would make the uphill battle against the polls even more difficult.

There is a chance that Big Tech might offer some relief. The likes of Apple, Amazon, Alphabet and Facebook are due to declare their earnings for the third quarter, and how those numbers are received could give the indices a boost, given that they were the ones largely responsible for the big market gains earlier in the year.

But for Trump, any such respite might be too little, too late. It looks as though Wall Street and Main Street are finally catching up in their gloom, and there is nothing the president can do about it.