It was a busy week for oil markets and looks to get even hotter in the weeks ahead. We sat down for an interview at Hedgeye's headquarters in Stamford to discuss the events of the week and upcoming catalysts and geopolitical risks for oil markets.
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The week started off with Venezuela arresting two Chevron executives on alleged corruption charges and thus creating even more risk to physical oil supplies that already exist from Venezuela's own mismanagement of state-owned oil company PDVSA. Venezuela production has already declined by 800,000 barrels a day (b/d) since 2016. The country produced 1.49 million b/d in March but under the OPEC deal, Venezuela is allowed to produced 1.975 million b/d. OPEC should give its Man of the Year award to Venezuela's President Maduro because the decline in production has made OPEC's job easier and accelerated drawdowns in global supplies. US sanctions on Venezuela oil is still under consideration but even without any US action, we forecast that Venezuela production may fall by another 500,000 b/d this year.
The week ended with an OPEC committee meeting in Jedda, Saudi Arabia and a victory lap that OPEC's production cuts will likely bring global stocks into the five-year average range next month. But don't look for OPEC to apply the brakes to the production cuts. Price hawk Saudi Arabia wants higher prices as it prepares for the Aramco IPO. Saudi Minister al-Falih said earlier this year that he would rather err on the safe side by cutting too much instead of too little.
Next big risk to oil markets - Iran oil sanctions. In three weeks Trump faces a May 12 deadline about waiving US sanctions on Iran oil sales. We believe Trump will reimpose oil sanctions that could remove about 1 million b/d that Iran has added to oil markets since sanctions were lifted under the Iran Nuclear Deal.
And now add Trump Tweets on OPEC and oil markets to the mix. Trump tweeted on Friday morning just as OPEC's committee was meeting that oil prices were "artificially very high" and warned OPEC that it "will not be accepted." As we wrote in our note on Friday, Trump is doing some positioning ahead of the Iran oil sanctions decision. First, it is another signal to the market that he plans on renewing sanctions; and second, he wants to get ahead of the blame game when oil prices rise. He wants OPEC's production cut deal to get the blame and not his policies. Saudi Arabia and other gulf producers that support Trump's Iran deal exit should get prepared for more Trump pressure to increase production to offset higher prices. This was not in OPEC's or Saudi Arabia's game plan as they were hoping to enjoy higher prices as the result of geopolitical risk.
The month of May is shaping up to be a red alert month for oil markets. As a result, the June OPEC meeting will be very consequestional. Stay tuned for more updates from us in the coming weeks and ahead of the OPEC meeting.
