President Trump reinserted himself in oil markets this week with a Tuesday tweet telling OPEC to "relax" its program to limit oil production and raise prices. But we think Saudi Arabia will “unfollow” Trump’s oil tweets and stay the course with its plan to balance the market.
Last year Saudi Arabia complied with Trump’s requests on oil supplies but it was viewed through the prism of reimposed Iran oil sanctions and a desire to help the President in an election year for mid-term congressional races.
As we explained in notes after the US elections, Saudi Arabia is now implementing a “Saudi-first” oil policy, and the market should take seriously OPEC’s pull-back on production to support prices after the declines late last year.
In our post-December OPEC note, we said that Saudi Arabia would likely cut even below their revised quota under the new production cut agreement. According to OPEC’s monthly report, Saudi production declined from 10.6 million barrels per day (b/d) in December 2018 to 10.2 million b/d in January. Production in February is likely hovering around 10 million b/d, and the Saudi’s have hinted production in March may be even lower around 9.8 million b/d. In addition, Saudi Energy Minister Khalid al-Falih recently said that Saudi oil exports will be significantly cut from 8.2 million b/d three months ago to 6.9 million b/d in March.
Trump tweeted Tuesday while enroute to Vietnam for the North Korea summit. We believe the timing of the tweet was to coincide with Jared Kushner’s meeting on Wednesday with King Salman and MBS in Riyadh. Kushner is on a Middle East trip to push the Administration’s peace plan and is accompanied by Brian Hook, the State Department’s special coordinator for Iran policy.
While Hook’s portfolio is larger than oil issues, we think its safe to assume that the topic of renewals of US waivers for Iran oil sanctions in May was discussed. We think Hook and other Iran-hawks in the Administration would like to see the waivers expire in May but Trump’s concern about oil markets likely means they were noncommittal on the subject.
In our view, renewals for the existing five Iran oil sanction waivers are already priced into the market. But the Administration has at least another month or so to make this decision and will be closely watching OPEC’s upcoming meetings in March and April and oil prices generally.
Ironically, while the US will be watching OPEC’s April meeting decision on production plans, the big data point for OPEC will also be whether the US extends waivers for Iran sanctions so we could see a great deal of volatility and headline risk ahead of both catalysts that collide in April.
To address some of this upcoming volatility, the US Department of Energy on Thursday announced a sale of 6 million barrels from the Strategic Petroleum Reserve as part of the scheduled sales mandated by Congress to help pay for the 2015 budget act. The sale bids are due by March 15 and deliveries are planned for April and May – just in time for the April 17 OPEC meeting and the US decision on renewals for Iran oil sanctions waivers.
There is some chance that OPEC could announce at the April meeting an extension of the cuts until the end of the year. But Russian Energy Minister Alexander Novak said today that it was too early to make this decision. We think it's unlikely OPEC will go big with an extension in April and will likely want to wait until confirmation about US waivers on Iran sanctions. The topic will instead be discussed at the regular-scheduled June OPEC meeting.
