By Barani Krishnan
Investing.com -- It isn’t OPEC if it isn’t drama. Yet, what’s playing out now on the stage of this expanded 23-nation coalition of oil producing countries that calls itself OPEC+ is too much drama - even for OPEC.
At stake is the delicate bond between two of the Arab land’s greatest allies: The Saudis and the Emiratis.
There’s also the risk of oil going to $100 a barrel if a production hike is not agreed by the 13 original members of the Saudi-led Organization of the Petroleum Exporting Countries and their 10 allies steered by Russia.
“You’ve probably not seen OPEC as smug as this about its power as a cartel, at least not since 2008,” John Kilduff, founding partner at New York energy hedge Again Capital, said, referring to the era when oil rocketed to $147 a barrel before plunging to nearly $25 in the financial crisis that followed.
“Alas, we learn from history that mankind never learns from history where greed is concerned, so it’s not surprising that OPEC is doing this,” Kilduff added.
The greed here is dual.
The Saudis apparently want an even higher oil price than now, albeit even if slightly more, while the UAE wants to pump more than the Saudi-Russian hegemony of OPEC+ would allow. Ultimately, both seek the same thing: more revenue for their oil despite a barrel already averaging $75 - the highest in almost three years.
According to the Financial Times, the Saudis want an even higher oil price to encourage more long-term investments in the industry.
“The kingdom does not want to see genuine shortages that could trigger a huge surge in prices, believing it would accelerate the shift towards renewable energy at a time when it is still heavily dependent on oil revenues,” FT energy writers Anjali Raval and David Sheppard reported, citing analysts.
Forget genuine shortages of oil. At the rate the Saudis and the rest of their brethren in OPEC are going, pushing prices up daily with the artificial shortages they have created via production cuts - not to mention the en masse effort to strangle the output of Iran, another bonafide and founding member of OPEC - will itself be an incentive for expediting renewables.
There’s something else coming too: Pressure from the Biden administration, which has finally awoken from its slumber on the inflation emerging from oil.
At Friday’s news conference, for the first time since the administration came to office in January, White House Press Secretary Jen Psaki voiced concerns about the impact of rising oil prices on American consumers, although she did not say if there would be more done to quell this. The administration is as much to blame for its green policies against fossil fuels that have stifled the zeal of American drillers to put out more oil at these prices to offset at least some of the OPEC+ cuts.
According to the grapevine and energy media, Saudi Arabia and Russia have proposed increasing production cautiously by 400,000 barrels each month between August and December, which other countries have broadly supported.
One can call this OPEC+ effort "cautious B.S." The Saudis and Russians - or that for that matter all the producers in the alliance - know that any hike short of 500,000 barrels per day by August could lead to another price spike in the direction of $100 a barrel. The press has been reporting this for days on end.
Prior to this week, Saudi Energy Minister Abdulaziz bin Salman tried to sound conscientious about the impact that a continuous rise in oil prices - already up more than 50% this year - could have on consuming countries, saying: “We have a role in taming and containing inflation, by making sure that this market doesn’t get out of hand.”
The Saudi minister’s determination in holding onto production cuts - OPEC+ is still keeping almost 6 million barrels of its daily capacity from the market - is evident from the mantra he recites each time when asked whether he’s happy about oil demand: “I will believe it when I see it.”
Despite oil global inventories back at five-year seasonal trends; despite the market virtually draining all of the excess supply from the Covid-triggered glut; despite U.S. drillers pumping 2 million barrels less per day now than before the pandemic; and despite a barrel trading three times higher today than 15 months ago, the Saudi minister says he’s still not convinced about oil demand, citing concerns about ramping infections from the Delta variant of the Covid-19.
Truth be told, the oil market’s 25% surge over the past three months alone is astounding compared to any resurgence of the pandemic in any part of the world.
Counting on Abdulaziz to help reduce oil prices meaningfully while his actual job is to do the opposite, is akin to giving a fox responsibility over a barn of chickens. As Kilduff points out, the Saudi action now tantamount to little more than greed.
The UAE, or United Arab Emirates, meanwhile, has other issues. It objects to the prolonging of any deal without re-evaluating it's maximum output capability set at the height of the coronavirus crisis (actually, none in OPEC+ weren't thinking of optimum output then; they were just grateful for the barrels they were able to put out).
UAE officials have privately felt they have lost out on production revenues by being asked to cut proportionally more than Saudi Arabia, exposing mounting tensions between two traditional Gulf allies.
The UAE-Saudi split has also raised questions over the relationship between the two, which was for a long time among the most powerful alliances within OEC. Analysts observed that ties between the two has been arguably weakened by Russia's entry into the wider OPEC+ alliance formed in 201.
Of course, the Saudi-Russian hegemony of OPEC+ controls everything within this alliance, and it's surprising if the Emiratis are only realizing this now.
At OPEC+ meetings, the Saudi energy minister often chastised members of the alliance for producing above their stipulated targets, while sitting next to his UAE counterpart Suhail Al Mazrouei, whom he knows to be one of the culprits.
Bill Farren-Price, a longtime OPEC-watcher and analyst at Enverus, said some of the strain in the UAE’s relationship with Saudi Arabia probably went beyond differing views on the OPEC+ deal.
“While they remain closely linked I don’t think they necessarily share quite the same strategic interests any more and may not want to be quite so closely tied,” Farren-Price was quoted saying in the FT article by Raval and Sheppard.
“I think there’s less interest in being associated with a group controlling oil production at a time when they’re strengthening ties in the west, and when they see their long-term oil policy as more about maximising volume ahead of any peak in demand,” he added.
At Investing.com, our logic is simple: At some point, consumers are going to lose their patience with soaring oil prices.
Our point is, under extreme circumstances, humanity finds extreme solutions.
The pandemic was a textbook example, with world oil demand grinding to a virtual halt, bringing OPEC to its knees. That was a health emergency, yes; but the same can be applied in a financial crisis. A year from now, if 50% of the working population goes back to telecommuting because of high oil prices, what will happen to the oil market then?
There’s a reason for the maxim: Consumers are king.
Oil Price Roundup
New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, soared to as high as $75.62 per barrel, a peak not seen since 2018, before settling Friday’s trade at $75.16, down 7 cents on the day. WTI did a final pre-weekend trade of $75.04. For the week, it rose 1.5%.
London-traded Brent, the global benchmark for oil, settled at $76.17, up 0.4% on the day and flat on the week. Brent did a final pre-weekend trade of $76.06.
Energy Markets Calendar Ahead
Monday, July 5
Observation of U.S. Independence Day Holiday
Tuesday, July 6
Cushing inventory data from surveyor Genscape
Wednesday, July 7
American Petroleum Institute weekly report on oil stockpiles.
Thursday, July 8
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
EIA weekly report on natural gas storage
Friday, July 2
Baker Hughes weekly survey on U.S. oil rigs
Gold Market and Price Roundup
Front-month gold futures on New York’s Comex settled Friday’s trade at $1,783.30, up $6.50 or 0.4%. For the week, it rose 0.3%. The final pre-weekend trade was $1,787.55.
Earlier in the week, the benchmark gold futures contract suffered its worst monthly loss in almost five years as it tumbled almost $135, or 7%, for June - its most since a 7.2% drop in November 2016.
The plunge came as bulls in the yellow metal were buffeted throughout June by incessant speculation about stimulus tapering and rate hikes by the U.S. central bank - despite neither of that happening anytime soon.
For the second quarter, Comex gold’s loss was less, though still substantial - at around $45 or almost 3%.
Conviction has become a rare commodity in gold as the average long investor tried to stay true to the yellow metal through its travails of the past six months.
Since January, gold has been on a tough ride that actually began in August last year - when it came off record highs above $2,000 and meandered for a few months before stumbling into a systemic decay from November, when the first breakthroughs in COVID-19 vaccine efficiencies were announced. At one point, gold raked a near 11-month bottom at under $1,674.
After appearing to break that dark spell with a bounce back to $1,905 in May, gold saw a new round of short-selling that took it back to $1,800 levels before talk of monetary tightening by the Federal Reserve sent it to a two-month low of around $1,750 this week.
For the record, the Fed has indicated that it expects two hikes before 2023 that will bring interest rates to 0.6% from a current pandemic-era super-low of zero to 0.25%. It has not set a timetable for the tapering or complete freeze of the $120 billion in bonds and other assets it has been buying since March 2020 to support the economy through the Covid crisis.
That has, however, stopped senior bankers on the central bank’s all-important FOMC, or Federal Open Market Committee, from commenting on the likelihood of a taper or rate hike in their public speeches. And talk they have, day after after, week after week since the FOMC’s meeting for June.
Typically, each hawkish speech on a taper or rate hike ends up hammering gold more than than a dovish comment would lift it.
Also, amazingly lost in the whole transition is gold’s position as a hedge against inflation. The Fed’s preferred inflation gauge, the Personal Consumption Expenditure Index, grew by a multi-year high of 3.4 percent in the 12 months to May. The more popular Consumer Price Index, meanwhile, jumped 5% in the year to May, its most since 2008.
Most commodity prices, from oil to grains such as soybeans, corn and wheat, are at multi-year highs.
But gold continues to fall, while the Dollar Index and U.S. 10-year bond yields have periodically risen, often on inane Wall Street talk and research about taper and rate hikes, despite trillions of dollars of government spending since the outbreak of the pandemic.
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.