Revenge of the Saud: A tale of Energy Geopolitics

02/13/2019 10:51 am EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

In Episode XX of Revenge of the Saud, Phil Flynn, Senior Energy Analyst The PRICE Futures Group, applies his unique approach to the ongoing battle between good, evil and greed in the world of crude oil production.

A short time ago in an oil producer far, far away:

Production Cut War!

May the Tweet be with you. The oil price was crumbling under attacks by President Yoda Trump, the tweeter, who told the producers in OPEC to prepare for tough sanctions on Iran. The Saudis and the Russian empire played into his game and raised production to satisfy the tweeter and establish price stability in the galaxy. 

These are heroes on both sides of the earth raising production to offset the loss of oil from the evil Iranian regime that has spread terror throughout the lands. In a stunning move, the tweeting U.S. leader, swept the cartel into chaos by then granting waivers to Iran’s oil buyers, costing the Saudis and the Russians billions of dollars. Lord Darth Putin was not amused, but it was the embattled murderous Crown Prince Muhamad Bin Salman that saw his anger rise.

 The Crown Prince vowed revenge and swore to avenge the tweeter’s deception and cut production until oil screamed back to $80 a barrel. Meanwhile in the former Venezuelan Republic, capital opposition leader Juan Guaidó has declared himself President and vowed at a rally in the capital Caracas to ensure humanitarian aid, blocked by the President Nicolás Darth Maul Maduro, is brought in to the country. Yoda Trump has tried to cut off Maduro’s cash line by sending money back to the opposition, but there is still unrest in the Venezuelan Senate as some military leaders and cronies announced their intentions to stay loyal to Maul while others plan their escape…………….

The Geopolitics of Crude Oil

Yes, it is the Saudi’s revenge. Despite folks believing that the murder of Journalist Jamal Khashoggi would keep the Saudis under President Donald Trump’s little tweeting finger; this is proving to be wrong. Not only are the Saudis adhering to current production cuts, but they are vowing to cut even more. That is a clear message that they are serious about their intent to get oil back up to $80 per barrel. In its monthly report, OPEC reported that its oil output fell almost 800,000 barrels-per-day (bpd) in January to 30.81 million bpd. 

Saudi Arabia said it would reduce its output in March by an additional 500,000 barrels to continue to send a message to the market that they are serious about reducing oversupply. Yet, according to the demand underestimating International Energy Agency (IEA), the global oil market will struggle this year to absorb fast-growing crude supply from outside OPEC, even with the group's production cuts and U.S. sanctions on Venezuela and Iran. The IEA left its demand growth forecast for 2019 unchanged from its last report in January at 1.4 million BPD. The IEA raised its estimate of growth in crude supply from outside OPEC to 1.8 million bpd in 2019, from 1.6 million bpd previously.

In the meantime, OPEC cuts and Venezuelan crude losses are already showing up in the data. The American Petroleum Institute reported a drop in crude supply yesterday. Crude inventories fell by 998,000 barrels in the week ended Feb. 8 to 447.2 million, compared with analysts’ expectations for an increase of 2.7 million barrels. Crude stocks at the Cushing, Oklahoma, delivery hub fell by 502,000 barrels, API said. Products were also bullish as API reported that gasoline was up only 746,000 barrels versus 826,000 expected and distillates down by 2.481 million barrels versus a drop of 1.142 that was expected. The EIA will create more support if they confirm these numbers today.

On top of that, oil is benefiting from the risk-on environment as it looks like the government won’t shut down, and continuing U.S. China trade talks. We also have comments by Fed Chairman Jerome Powell that says the Fed is still in patience mode. That will give support to stocks and oil and with a little help from the EIA, the bulls will regain control.

Bloomberg News Reports that “U.S. sanctions, that have effectively blocked American imports of Venezuelan oil, are leading to a crude-price surge thousands of miles away in China. State-run energy giant PetroChina Co. is selling Venezuelan Merey oil at a premium of about $5 a barrel to benchmark U.S. West Texas Intermediate, according to an offer document seen by Bloomberg. The grade was sold at a discount in the Asian nation before the Trump administration began targeting the OPEC producer late last month in a bid to oust autocrat Nicolas Maduro.

The U.S. measures have sparked speculation over whether Venezuela will be able to sustain exports of its dense and sulfurous “heavy-sour” crudes. Meanwhile, American refiners are scouting for alternatives, squeezing supplies of similar oil varieties across the globe. Booming demand for infrastructure in China has made such grades prized in the Asian nation because they are suited for making bitumen — a residue of refining also known as asphalt.” Stay tuned.

Reuters reports that “Advisers to Venezuela’s self-declared president Juan Guaidó have proposed he appoint six executives to a transitional board for U.S. refiner Citgo Petroleum Corp, Venezuela’s most important foreign asset, four people close to the talks said.” 

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