Weak demand overshadows OPEC cut

Matein Khalid

Saudi Arabia’s unilateral 1 MBD output cut in Vienna last week did not trigger a credible rally in crude oil prices. Au contraire, Brent ended the week at $74.80 and West Texas a tad above $70, down 2%.

Prince Abdulaziz’s warning to the oil bears to “watch out” has failed for the second time since April’s shock OPEC+ supply cut. It is obvious that both the wet barrel market and the energy futures pits of Chicago, New York and London have concluded that week diesel demand in China and the EU overshadows the OPEC supply cuts even though the latest tanker movement data suggests that compliance with the April quota cuts has been unusually high in May. Non-OPEC+ supply also fell by 400,000 barrels a day. The first post Vienna week in June ended with a whimper and not a bang. A wild rumour about a breakthrough in US-Iran nuclear talks led to a 5% plunge on Thursday but reversed as soon as the White House denied the rumour.

Geopolitics and black gold remains Siamese twins from the time Nasser nationalized the Suez Canal in 1956, King Faisal imposed the oil boycott after the October 1973 war in the Sinai/Golan, the Shah lost his Peacock throne (stolen from the Mughals when Nader Shah sacked Delhi in 1739) to Khomeini, Saddam invaded Iraq in 1980 and Kuwait in 1990, George Bush decapitated the Baathist regime in Baghdad in 2003 and above all, China’s post WTO emergence as the world’s second largest energy consumer. The Russian invasion of Ukraine led to a classic oil shock and Brent traded as high as $130 last summer but has lost 40% as global recession angst and Russian tanker loads of cheap black market Russian crude flood Saudi Aramco’s markets in Asia.

The last six months have been a license to print money by calling the Saudi/OPEC bluff and selling Brent on any spike triggered by an output cut. Despite the epic collapse of oil prices since last June, the psychology of the futures pits is still bearish as macro hedge funds reduced but did not entirely cut their short positions in Brent on the eve of the Vienna conclave. The oil bears have two powerful macro trends in their favour. One, the Kremlin has simply not kept its promise to the Saudis to cut its Ural crude output by 500,000 b/d and its agents are selling its Ural crude to China and India well below the price cap. Two, China’s post COVID recovery, while real, has not had a gangbuster impact on distillate demand. PRC’s factory orders, industrial production, retail sales and net exports have all disappointed investors. China could well be in the death spiral of a balance sheet recession due to its $25 trillion property debt debacle, akin to Japan’s two lost decades after 1990. If China’s secular GDP growth rates is only 2% for the next decade, the Gulf must brace for another painful 2014/2015 scale oil shock. This is the context in which Saudi Arabia’s strategy to “stabilize the market” (code word to nudge prices higher) has utterly failed in April and June

Also published on Medium.