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| Countries (OPEC), Khalid al-Falih, Saudi Arabia's energy minister, and Alexander Novak, Russia's |
Many market factors influence the global price of crude oil, but the current reality is that OPEC and Russia are pretty much in control.
If you have found yourself whip-sawed by the ups and downs in the oil markets over the past few weeks, don't be too concerned: you have plenty of company. While the decision by President Donald Trump to suspend U.S. participation in the Obama-era Iran Deal has predictably not led to a massive run-up in crude prices that some had projected, it has contributed to a new bout of oil price volatility after months of relative stability.
Crude prices actually fell early on the day the President made his announcement, recovered later in the day, and then rose by a little more than $1/bbl in the few trading days afterwards. Not exactly an overwhelming reaction to what was a major policy decision, most likely because the decision was predictable and had already been priced into the market.
The price then trended generally upwards, with Brent breaching $80/bbl and WTI moving briefly above $72 before Friday, May 24, when the next big shoe dropped. Prices fell by about 5 percent that day as news broke that Russia and OPEC were engaging in discussions that might result in their boosting production quotas under their export limitation agreement by several hundred thousand barrels per day in order to prevent prices from rising to what could become demand-destroying levels.
Russian President Vladimir Putin was quoted as saying that Russia is fine with a $60 oil price, because prices higher than that level “can lead to certain problems for consumers, which also isn’t good for producers."
OPEC Secretary General Mohammad Barkindo credited much of the momentum behind the Russia/OPEC talks to a tweet President Trump issued more than a month ago, in which he said "Looks like OPEC is at it again. Oil prices are artificially Very High!".
"We were in the meeting in Jeddah, when we read the tweet," Barkindo said, "I think I was prodded by his excellency Khalid Al-Falih that probably there was a need for us to respond," he said. "We in OPEC always pride ourselves as friends of the United States."
As is so often the case with news out of OPEC, it has become apparent this week that the market probably over-reacted to the May 24 news, as OPEC and Russian officials have become more equivocal in their public statements on the subject of increasing production at the June meeting. It now seems more likely that the ministers will take a wait and see attitude towards price movements, and agree to some sort of mechanism that would allow them to react quickly should prices make a significant upwards - or downwards - move.
Despite the volatility of recent weeks, the likely overall inertia behind crude prices is in favor of a continued move upwards. The U.S. and global economy remain strong, so we can expect continued strong demand growth for the remainder of 2018. And while the domestic U.S. industry continues to set new production records every month, the monthly increment is a fraction of the rise in global demand. The re-implementation of U.S. sanctions on Iran has already led to a raft of announcements of companies cancelling business dealings with the Islamic state, and will begin impacting Iranian exports in the coming months.
So, while we can expect this new price volatility to continue for the foreseeable future, unless and until OPEC/Russia react by putting more exports onto the market, the overall inertia behind crude prices continues to mitigate in favor of higher prices to come.
The current situation is a testament to how effective the agreement between OPEC, Russia and several other non-OPEC exporting countries has been in influencing the recovery in crude prices over the last 17 months. If the participating countries can maintain the discipline they've displayed thus far in conforming to their output quotas, there is no reason to believe the deal will not continue to be just as effective into the future.
Source: Forbes
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