The Daily Dose; Brent Overheated.

-Analysts scoff at Riyadh’s Clint Eastwood Moment

-Libya may be back in play.  

The market taste-tested $43 per barrel for Brent crude oil and didn’t seem to care for it much, at least in movements before the start of Friday trading in the United States. The global benchmark for the price of oil is on a bull run, on pace to rally some 8% this week. The trend upward comes amid demand concerns and a lack of discipline among the producers huddled under the OPEC+ umbrella. Apart from compliance, OPEC may also have to figure out how to deal with what looks like an eventual return of Libyan barrels on the water. Meanwhile, the consolidation of an anti-Iranian bloc in the Middle East could be formalized by energy infrastructure linking Israel to Saudi Arabia. And it’s a quad witching day, so anticipate some wobbly trading. That said, with the rally moving in contrast to real-world scenarios, a correction could be brewing for crude oil.

Brent crude oil notched nearly all of the gains on the week over two straight sessions. Saudi Arabia has said it would crack the whip on cheaters, though weak demand over the pandemic suggests producers may start playing a game of spoons for market share. With contracts expiring, traders were cashing in on the rally. Brent was down about 0.7% as of 8 a.m. ET to hit $43 per barrel on the button.

Ignoring warnings on demand from BP, the IEA and OPEC this week, Brent broke out in technical fashion earlier this week. Brent got some support from positive signals in the US and Chinese economies, though a deeper dive shows caveats in any estimate for recovery. Russia, one of the more influential producers in OPEC+, is seeing its budget squeezed by federal stimulus. The Russian Finance Ministry is expected to work to draw down a deficit, and sees a break-even price for oil closer to $50 per barrel rather than previous estimates near the $80 mark. Russian Energy Minister Alexander Novak, who sits on the committee monitoring OPEC+ compliance, said a week or so ago that producers should look to recover market share as demand improves. More recently, Novak suggested the market was tilted toward the supply side by about 2 million bpd. Pre-pandemic demand levels are unlikely, meanwhile, until the second quarter of 2021.

Saudi Energy Minister Abdulaziz bin Salman made headlines yesterday by warning that gambling on price direction would “hurt like hell.” In his morning note, Reuters oil guru John Kemp reminded us that it’s not what you say, but what you do that matters.

“Rhetoric can be a signal of intentions. But it can also be a substitute for action,” he wrote. “If Saudi Arabia wants to deter short-selling in the oil market, it will need a stronger global economic recovery, or be willing to reduce its own production further relative to oil consumption and the output trajectory agreed in April and June.” (italics are his)

Secondary sources reporting to OPEC economists said Saudi oil production in August was around 8.9 million bpd, compared with June output of 7.5 million bpd. For Ole Hanson, the head of commodity strategy at Danish investment firm Saxo Bank, said the bounce on Saudi rhetoric alone will be short-lived.

“While the U.A.E., a major laggard in August, will cut production again, some concerns linger with regards to Iraq and Libya,” he wrote. “Iraq has, according to tracking data, increased its production this month while Libya’s ceasefire may support a recovery from the current sub-100,000 barrels/day of production.”

Not only did Iraq increase production, it also joined the queue of producers in and around the Persian Gulf who lowered their official selling price for October loadings. Libya, meanwhile, looks to be on the cusp of a pivotal moment in its long civil war. Khalifa Haftar, a rogue military general and the face of an opposition government in the oil-rich east of the country, suggested oil could be flowing soon. The country’s National Oil Corp., however, stated that force majeure would remain in place so long as foreign mercenaries, namely the Russians, were meddling in Libyan oil installations. We’ve been here before with Libya. What’s different now is that Haftar seems emboldened by US support, so we wonder if the political tides are turning in his favor. Remember, legend has it that Haftar was on the CIA payroll so his ties run very deep. Libyan output is at a trickle, though it can quickly ramp up to 1 million bpd.

In the Persian Gulf, it looks like Iran is still able to cheat a bit by masking voyages from Fujairah, or at least trying. Iran has been able to sneak petroleum products all the way across the Atlantic to enemy-of-my-enemy Venezuela. With an Arab bloc warming to arch-foe Israel, we can expect Iran to continue to test the waters, and not just in terms of vessel traffic. Worried that the Palestinian cause is over with the Arab pivot toward Israel, Iran shamed its Gulf neighbors for the move. Pointing a finger directly at Bahrain, an Iranian envoy, Mahdi Agha Jafari, warned of trouble in the Persian Gulf. US President Donald Trump is ramping up the pressure, though it looks like this president is increasingly isolated and unable to repeat the go-it-alone strategies from his predecessors. And it may be a coup of sorts for Saudi Arabia if it can link energy networks to the Mediterranean via Israel, but given emerging tensions in the Mediterranean, exports from there are no safe bet.

2 thoughts on “The Daily Dose; Brent Overheated.

  1. Dan your articles are wonderfully researched and well written. Unfortunately its bkatablty obvious from your writing to see that you have a short position on oil and the lack of balance is somewhat of a shame.


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