Ups and downs in the oil markets prior to OPEC+ and Aramco IPO
The beginning of December will be very important for oil markets. Not only will there be the Saudi Aramco IPO but on Dec. 5-6 there is also the meeting of OPEC and OPEC+, where the OPEC nations will be joined by 10 other oil-producing nations led by Russia. This is why all eyes will be on the price of oil over the next two weeks.
Investors in the IPO are interested in the price volume correlation and what that means for the oil giant’s earnings power. There is big interest in the offering though: Saudi Aramco is still the world’s most profitable company measured by net income, and also the world’s lowest cost producer.
The OPEC+ meetings will be important because ministers will have to decide whether to extend or even raise the production cuts of 1.2 million barrels, which they agreed on during the last meeting in early June. December is not a drop-dead date though, because ministers agreed in June to a nine-month duration of the cuts. This means that there will be a three-month grace period if an agreement cannot be reached in December.
These days the oil price is closely related to the progress of the US-China trade negotiations, which is not surprising. Global economic growth in 2020 will depend on whether the world’s two largest economies can find a resolution to their trade spat. A slowdown in global trade will have major ramifications for oil demand. Oil remains the fuel of choice for transport. A realignment or even localization of supply chains will quickly feed through into demand for oil and the commodity’s price.
Last week saw volatility. The price fell from a Monday high of 63.5 to a Wednesday low of 60.3 just to rebound to 64.3 on Friday, fall to 62.3 on Sunday and rebound by a good 30 cents on Monday’s early Asian trading. These prices moved in lockstep with announcements and rumors as to how close US and Chinese negotiators were to concluding Phase 1 of a trade deal this year. Draft US legislation supporting Hong Kong demonstrators and halting exports of certain armaments to the territory put a potential spanner in the quick conclusion of Phase 1 and with it temporarily reversed the trajectory of the oil price in the middle of last week.
These days the oil price is closely related to the progress of the US-China trade negotiations, which is not surprising.
Looking at fundamentals, US Energy Information Agency (EIA) crude stocks rose by 1.4 million bpd in the US for the tenth consecutive week ending Nov. 15. The International Energy Agency’s (IEA) monthly oil market report, which was released on Nov. 12, highlighted that demand increases of 1.1 million bpd in the third quarter had more than doubled since the second quarter. It also pointed out that supply rose by 1.5 million bpd, reflecting Saudi Arabia’s ability to restore production in full after the attacks on Abqaiq and Khurais.
The IEA further said that current oil price levels did not reflect inherent geopolitical risks. That may be so. However, Royal Bank of Canada’s head of commodity research, Helima Croft, pointed out earlier this month in Abu Dhabi that oil prices no longer served as a barometer for geopolitical tensions.
Other factors affecting the price in the short to medium term will be where non-OPEC supply really ends up next year. Are the IEA’s predictions of a 2.2 million bpd increase correct? The new International Maritime Organization (IMO) standards that stipulate an 80 percent reduction in sulfur emissions from Jan. 1, 2020, will doubtlessly also feed into the supply/demand picture.
All in all, that is plenty of food for thought for the oil ministers when they gather in Vienna next week. Looking at the supply and demand picture they may want to further tighten supply. However, Russia’s Deputy Finance Minister, Vladimir Kolychev, spoke to Bloomberg of his skepticism about the usefulness of further production cuts for Russia. Others are said to be in favor. We shall know where the chips will fall on Friday next week. The grace period until the end of the first quarter in 2020 in reaching an agreement might enable oil markets to take it in their stride.
• Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources