OPEC + Russia may have President Trump over a barrel as they contemplate extending production cuts with the May 5 deadline on Iranian sanctions relief looming.
Whether President Trump called Saudi Arabia or did not call Saudi Arabia, at this point it may not matter. It appears that OPEC +1 (Russia) is not going to listen. Oil prices are on the rise as Saudi Arabia says that instead of raising oil output to please the President, they may actually be thinking about extending OPEC production cuts. Saudi Energy minister Khalid Al-Falih said that OPEC is ready to extend cuts through the end of the year despite an alleged call from President Trump not to mention a Presidential tweet.
This comes one day after Russia seemed to suggest that OPEC should ignore Presidents Trump’s call for more oil production and that they should not raise output to offset the loss of Iranian oil but just stick to the agreement. The Russians are signaling that they want the President to feel the sting from his policy of zero oil exports from their ally Iran and seemed to suggest to OPEC that they had a deal. Tweets or no tweets, the Russians expect the Saudis to stick to it.
The Wall Street Journal reported that “The Trump administration says it made it clear to China that there would be no further waivers granted subsequent to those given in November”. The anonymous official said: “They’ve known about it, so to my knowledge that’s not being contemplated.” The official said the State Department should be asked about wind-down periods but the Department would not respond immediately. An official added: “We understand they don’t like this. But at same time they tend to act pragmatically, and they are going to take what the best most reliable deal is.”
This new development with OPEC will also put more focus on U.S. oil and product Inventories. U.S. crude oil inventories are at the five- year average for this time of year but gasoline inventories are 2% below the five-year average and distillates are about 6% below the five-year average. With continuing outages from Venezuela and the fact that May 5 is zero hour on Iranian oil exports, there is a major risk of U.S. oil supply tightening in the coming weeks. We should see a small 2-million-barrel draw in crude oil but that will look bigger against this geopolitical back drop. Refiners are starting the long road back of maintenance, but we still expect that gasoline and distillate supply will fall even further.
This situation has the market shaking off weak Chinese Manufacturing data that seemed to give gold a boost. Reuters reported that the Caixin/Markit factory Purchasing Managers’ Index for April was 50.2 — lower than the March reading of 50.8 and missing the 51 projected by analysts in a Reuters poll. Results of the private Caixin survey came after China’s National Bureau of Statistics released official manufacturing PMI for April, which fell to 50.1 from 50.5 in March. Analysts polled by Reuters had expected the indicator to stay at 50.5.
Of course, this means the increase at the gas pump is far from over. Diesel is also at big risk. Hedgers are happy right now and looking forward, there are more upside risks. Refiners must run smoothly from this point forward. Any mishaps will hit you in the wallet. The U.S. economic strength will keep the demand side pressure on.
The MoneyShow Las Vegas (May 13-15) will be here before you know it. I hope to see you all there!
