As we said in our Hedgeye client note last week, the OPEC+ group and Saudi Arabia will not let oil prices dive without a fight. We have just learned that OPEC will move its special March 5/6 meeting in Vienna up a month early to sometime next week (week of February 3). We expect an official announcement later this weekend on the date change.
At a minimum, we are forecasting an extension of the deeper cuts enacted in December to at least June but we believe there is a good possibility that making additional deeper cuts is under active consideration.
For most of 2019 oil prices took a beating because of oil demand concerns resulting from the US-China trade war. A phase-one trade deal and deeper OPEC cuts gave oil prices a lift at the beginning of 2020 but just like whack-a-mole, China demand issues are front and center again with dire news of the spread of the Coronavirus.
Coronavirus is casting a huge shadow on oil demand and the global macro-economic picture. And you can’t argue with the data. Hedgeye’s own macro process shows very recent data potentially signaling a move from Quad 3 (long oil) to Quad 4 (short oil), and moreover, USD strength is also a problem weighing on oil.
However, Coronavirus is not the only game in town. In our view, geopolitical risk remains sky high as news of a Katyusha rocket attack at the US Embassy compound in Baghdad last week demonstrated. The rocket attack received little news coverage, mainly due to very limited damage to vacated buildings at the embassy. But the attack is a reminder that while Iran may not directly attack US interests after Trump’s Soleimani killing, there remains tremendous risk from Iran’s proxies in the region.
On Wednesday, we learned that Houthi rebels in Yemen launched rockets at the Aramco refinery complex in Jizan on the Red Sea last week. The rockets were shot down with no damage to the facilities but it’s another example of continued risk in the heart of the oil producing Middle East.
There is not much you can say for sure about oil markets but we think it is safe to assume calm waters will not endure in 2020 – especially stemming from the US-Iran conflict.
General Dan Christman, our Hedgeye colleague who advises on geopolitics issues, expresses the same concerns in a recent note. “Iran may be restrained over the near-term by a now-clear US red-line, but don’t expect Iran’s proxies to feel that same sense of moderation – especially those based in Iraq and led formerly by (the late Abu Mahdi al-) Muhandis,” Christmas wrote. He added that the Iranian shoot-down of the Ukrainian airliner “demonstrated yet again how a single event in this region can quickly change international narratives.”
Coronavirus is dominating the oil market universe today but forget Iran proxies and Katyusha rockets at your own risk. And certainly don't count out OPEC.
