President Trump reached for his oil market red phone for a call with King Salman of Saudi Arabia as oil prices stayed above $80 last week and now flirt with $85. Trump delayed his Saturday golf game for the call that was characterized by the Saudi state-run press agency as a discussion about the “stability of oil markets.”
While the US did not release a statement on the substance of the call, you can bet that oil prices were Trump’s top concern. Our Hedgeye client note last Tuesday said Trump was “seething” over high oil prices resulting in his tough OPEC criticism at the United Nations General Assembly. We also said in our note that “the President may also call King Salman directly if prices do not retreat below $80 in the coming days.”
Here are five things we are watching over the next two weeks that may halt the current oil market rally, at least temporarily.
1. We expect more news from Saudi Arabia on additional production as Saudi Energy Minister Heads to Moscow Thursday. After Trump’s UN speech in which he called on OPEC to increase production and “start lowering prices”, US officials began reaching out to Gulf producers with similar messages. Trump believes he has an agreement with Saudi Arabia and the UAE to offset any Iran barrels lost from sanctions that both countries support. The market was clearly disappointed with the OPEC meeting that did not offer a specific number for increased production. Two days after Trump’s speech, Reuters reported from an unnamed source that Saudi Arabia was adding 550,000 b/d. The oil market yawned at that report, and we think prompted Trump’s call with the King to do more. Saudi minister al-Falih told reporters after the press conference in Algiers last Sunday that September production would be up and October would be higher than 10.6 million b/d. We would not be surprised to see a statement from the energy ministry or Aramco soon with more specifics on added production. Minister al-Falih will be in Moscow on Thursday when a joint statement with Russian oil minister Novak would be expected.
2. Russia production data for September due to be released Tuesday. Russian production is reported to be now at a post-Soviet high. The Russian energy ministry will publish today (October 2) its September production data that Reuters reported last week will be at 11.347 million b/d. If accurate, this figure would be an increase of 130,000 b/d from August levels. Russian energy minister Novak said in Algiers that Russian production can ramp up to 300,000 b/d by the end of the year. The Russian and Saudi energy ministers will meet in Moscow on Thursday. We think you can expect more, even stronger words about additional production coming online.
3. NOPEC Senate Hearing Wednesday As Prices Rise. The Senate Judiciary Committee’s anti-trust subcommittee will hear from Makan Delrahim, Assistant Attorney General for the Anti-Trust Division, on Wednesday afternoon. We expect it to be the first time that the Trump Administration will go on the record on the so-called “NOPEC” legislation introduced in both the House and Senate. As a private citizen, Delrahim strongly supported the NOPEC legislation saying in an oped in the Hill newspaper in 2008 that OPEC “has been flagrantly violating U.S. and foreign antitrust laws for decades with impunity.” The NOPEC legislation, which allows anti-trust enforcement on OPEC and its members by removing the sovereign immunity exception, has caused concern in Vienna and Riyadh. At OPEC’s June meeting in Vienna, the buzz was all about the NOPEC legislation that was introduced as gasoline prices rose during the high demand summer driving season. We think it was one of the key reasons why OPEC unanimously approved the 1 million b/d production hike in June. Saudi Arabia and OPEC are keen not to give the legislation momentum as least before the US election in November. Unlike previous Presidents who prevented the legislation from advancing, Trump is seen as a wild-card. The live feed, which will be watched closely in Vienna, can be viewed here.
4. Strategic Petroleum Reserve Is Still Very Much in Trump’s Playbook. Last week Energy Secretary Rick Perry said there were no plans to release oil from the nation’s Strategic Petroleum Reserve (SPR) and that price impacts would be negligible. His comments made major headlines that may have given bulls more room to run on prices over the past few days. While his comments were accurately reported, we don’t think the market should assume it is the last word on the topic. Secretary Perry's comments simply reflect DOE's institutional position that the SPR should only be used for supply disruptions and not to impact prices. While we would agree with Perry that, depending on the amount released and basic market fundamentals, the price impact should be minimal. But experience shows us that the market seems to view SPR releases generally as bearish for prices. If pressed, we think DOE would say that their official position is that no current SPR release is planned, but it certainly can change with circumstances. We believe you can make a strong case that declines in Venezuela production already justifies a release. The White House has the deciding vote on any SPR release but DOE is a major player on the policy discussion and implementation. We think that if prices remain elevated, the chances of an emergency SPR release before the end of October is close to 60 percent and rising. A SPR release is still very much in Trump’s playbook.
5. Oil Price Headwinds May Result from China’s Mixed Signals on Iran Sanctions & Refinery Maintenance. In our view, one of the main reasons behind the spike to near $85 on Monday was a news report from Reuters that Sinopec had cut Iran imports in half after pressure from US officials. Before this news, China was viewed as Iran’s last best customer and some also believed it would increase purchases of cheaper Iranian crude after US sanctions. The Sinopec report splashed very cold water on this theory. We have maintained for some time that China would continue to buy Iranian crude but at current lower levels and would not sop up all of the additional Iranian crude on the market after sanctions. Our belief was that China would want to defy the US sanctions but still try to be strategic by not increasing imports and sticking a finger in Trump’s eye. But we don’t think China will be this clear on the topic to keep its strategic leverage, and therefore we expect more mixed signals on China’s non-compliance with US sanctions. On a separate note, we are now entering refinery maintenance season when refineries shut down for repairs and to also switch to winter blends. The result means less demand and consumption data that will be bearish for oil prices and perhaps assist OPEC in getting back the narrative over oil markets. Genscape, which tracks refinery maintenance data, reports that while Gulf Coast (PADD 3) will have a lighter than usual turnaround season, the Mid-Continent (PADD 2) has been running at record utilization rates this summer and even deferred some spring maintenance to the fall. Genscape expects that the deferred maintenance combined with scheduled maintenance this fall will result in the lowest utilization rates since 2015 for the Mid-Continent at 89 percent and 84 percent for September and October respectively. OPEC is playing close attention to refinery maintenance season and you should too. The Genscape report is available here.
