Two key, of several, points I made:
[02.10.23 Note: Some typos/syntax corrected. Somehow could not edit w/ my phone yesterday.]
–1– The Saudis have no intention to spike oil price over $100/barrel, at least not for long – that’s my read.
Their customers’ economies are troubled, especially China, but Europe too – where too-high-an-oil-price could re-boost inflation, even push them into recession(s) killing oil demand.
Over the last year, the Saudi’s were newly proactive (their traditional mode was always to react after-the-fact). And their economists’ market calls were correct.
For several months, OPEC+ cumulative production cuts barely held prices stable. Only in recent months, along with new (though tepid) demand, did prices climb, form high-$80s to now mid $90s.
The Saudi minister professes to be unsure whether demand will rise in Q4. The IEA and the futures market (in backwardian now) see tightness. The Saudi minister answers that, if that happens, he has plenty of oil ready to put back into markets.
But – Nota Bene – despite present drawdowns in USA oil stocks and apparent tightness elsewhere, suddenly many oil analysts are saying that the present price rally could be short lived, and that OPEC-plus may have to keep or even deepen its cuts to maintain prices as they are.
Here are three very useful reports to this effect:
- “Oil Rally at Risk From Swing to Surplus Next Year” – Bloomberg https://www.bloomberg.com/news/newsletters/2023-09-29/oil-rally-at-risk-from-swing-to-surplus-next-year?
- “Oil Price Rally Meets Resistance Despite Bullish Catalysts” https://mailchi.mp/6d1e09cf443e/oilprice-intelligence-report-why-oil-prices-are-seeing-a-steep-correction-1528868?e=7faf4b2585
- “Wall Street Expects Hot Oil Prices to Cool Down” – WSJ https://www.wsj.com/finance/commodities-futures/wall-street-expects-hot-oil-prices-to-cool-down-c3013500?mod=itp_wsj,djemITP_h
–2–
The Russian price cap has had a significant effect on Russian income (I cited US Treasury report with data in my previous blog post). However, with the OPEC-plus production cuts, they clearly cut the volumes transported by tankers insured in the EU and G7, where the price cap cannot be exceeded. This means that the substantial number of non-EU or -G7-owned &/or insured ships that they had succeeded in finding to transport oil (to large extent, a fleet of old ships) now represent a higher percentage of all carrying Russian volumes. So, ipso facto, a higher percentage of Russian oil is avoiding the price cap without any apparent significant increase in the number of ships in Russia’s “shadow fleet.”
A recent FT article very informative in demonstrating this increase in Russia avoiding the price cap included a chart (see below) that shows that the number of non-price-cap-affected ships has not substantially increased all this year, but the amount of oil Russia has shipped has decreased (mainly due to the joint OPEC-plus cut with the Saudis). And, they obviously used this opportunity to avoid using about half of the ships (e.g., as of May this year) that were constrained by the oil-price cap. (The FT article did not draw this conclusions from the chart, but it seems to me to be there in the data).
Reports say Urals is going for about $83 to $86 on average now, about $10 below the market price. That indeed does cut Russian profits; but much less per barrel than was occurring previously.
In addition, the Russians are finding many other methods and routes to get around sanctions. (More on this here soon.) Something indeed must be done. However, there seems no appetite to do so at present, in particular with the nervousness in the EU, G7 and USA over the presently nearing-$100/barrel price.
However, it is clear that much new oil is in the development pipeline globally, and there are plenty of proven reserves outside Russia to support this expansion (and global proven reserves are growing. See Rystad on this: “Recoverable oil reserves top 1,600 billion barrels,” 29Jun23, accessed. 30sep23, https://www.rystadenergy.com/news/recoverable-oil-reserves-billion-barrels-warming-planet).
I also stressed that the Biden administration is actively engaged (supposedly quietly) to get what could be substantial new production online ASAP from places like Venezuela and Iran; but also Guyana and Suriname.
IMHO *eventually* this will lead to a feeling of confidence to squeeze the price-cap lower and, importantly, hopefully also to the introduction of some new methods with enforcement teeth, for example secondary sanctions.
Some interesting possibilities, summarized by former US official, Eddie Fishman are here: https://twitter.com/edwardfishman/status/1706745304891138152 )
The Global Barrel 