Well, you’ve gotta love crude.
A while back - we’re not sure exactly how long, chalk it up to bad short-term memory - we noted that this was about to become another round of OPEC headline hockey, all of it completely meaningless except of course to the non-thinking algos that will simply buy/sell the “news” even when there is no real news to buy/sell.
Well have a look at this lunacy:
Just as we said: headline hockey.
We’re still not sure why this a mystery to analysts and traders alike. First, a production freeze doesn’t matter when everyone is producing at a record clip. Freezing at a record rate changes absolutely nothing. Further, Iran isn’t going to go along with this. We don’t care what their polite rhetoric indicates. Would you agree to freeze production after years of being isolated from the international financial system? Of course not. You’re going to maximize profits at all costs (no pun intended).
And yet still, traders want to act like this has something to do with something other than algos and OPEC. Consider this quote from Reuters on Tuesday:
“In the U.S. market, traders said that the market was supported by Genscape data reporting a draw of some 700,000 barrels of crude last week at the Cushing, Oklahoma, delivery hub for U.S. crude futures.”
Sure. We’re not sure how many times we have to say this, but frankly, US production doesn’t matter. US producers are going to ramp production at around $55/bbl and no one of any consequence cares. That’s just going to increase supply, drive down prices, and drive cash flow negative US production right back out of business. Plain and simple.
What matters is the geopolitics between Russia, the Saudis, and Iran. Remember, no matter the politically correct pressers, Russia is backing Iran in Syria and the Saudis are backing the other side (i.e. the Sunni insurgency). The insurgency cannot win with Russia there. Period. End of story. So what the Saudis are doing is playing geopolitical chess with oil prices.
But they’re going to lose. Their budget deficit is 14%. The riyal’s dollar peg is under pressure.
Their FX reserves are dwindling. And if their proxies lose in Syria (which they will unless the West intervenes directly), they are going to lose their grip on the peninsula. Here’s Citi’s take:
“Iranian involvement remains the key hurdle to any OPEC (in)action yet even if this occurs, it is unlikely that any viable agreement would impact physical market balances. Iran exported 2.1-m b/d of crude in August, up 0.9-m b/d since January and close to the pre sanctions 2011 level of 2.4-m b/d. Iran and Russia believe that Iranian oil production shouldn’t be capped below pre-sanctions levels in any agreement, which is likely to be some 200-300-k b/d above current levels. Iran’s ability to actually produce at that level is questionable in our view, especially with floating oil storage having fallen ~7-m bbls since March as Iran has tried to keep exports table at ~2.2-m b/d. Iraq have also been in favor of an output freeze whilst simultaneously communicating that they will grow production this year and next.”
(Chart: Citi)
The West needs to be careful. They’re about to lose their grip on the Mid-East to Russia and Iran. And as much as the Saudis have been rightly condemned for myriad human rights abuses, we’re not sure this new “crude world order” is desirable.
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