A series of mixed messages from The Organization of the Petroleum Exporting Countries (OPEC) cause oil price volatility to spike recently. Whether the market is tightening up quickly, or there will soon be a global glut of oil—these are the contrary perspectives held by oil producing nations, offering a cloudy outlook for the market.
Oil prices took a nosedive since peaking in early October amid fears of a potential supply glut and cooling global demand. Crude futures benchmarks have slid more than 20 percent, entering a bear market.
To prevent a further slide in oil prices, Saudi Arabia recently announced its plans to cut production, reversing the 1 million barrels per day (bpd) output increase agreed to by OPEC and Russia in June.
On Nov. 12, Saudi Arabia’s Minister of Energy Khalid Al-Falih said that the kingdom would slash oil exports by 500,000 bpd next month. OPEC is expected to weigh such possibilities at its Dec. 6 meeting in Vienna.
Trump, who is critical of OPEC’s decision to raise oil prices, quickly responded to Saudi’s decision to cut output.
“Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!” Trump tweeted on Nov. 12, causing oil prices to slide further.
Trump has repeatedly criticized OPEC on Twitter and called on the organization to lower the oil prices.
Al-Falih said the OPEC countries and non-member Russia together need to cut output by 1 million bpd in December. Russia’s Energy Minister Alexander Novak, however, told reporters last week that “the market is in the stage of a good balance” because of temporary waivers for Iran oil.
The Trump administration reinstated economic sanctions on Iran early this month. To prevent a spike in oil prices, however, Washington granted waivers to eight countries for oil imports from Iran.
Oil prices sold off sharply following the news of exemptions. The market’s initial expectation was a more dramatic decline in global supply with fears of potentially zero Iranian exports in November.
Trump’s messages and Saudi’s response to oil prices suggest that the market will have “a noisy run-up” to the OPEC meeting next month, stated Citi analysts in a note to its institutional clients.
The Illusion of Supply Glut
Some oil experts believe that market will tighten considerably heading into winter, and Saudis are moving too quickly to halt the slide in oil prices.
There is an illusion of a supply glut that currently does not exist, according to Phil Flynn, analyst at Price Futures Group in Chicago.
“In fact, global inventories have been tightening, floating storage in oil is at 10-year lows, and demand numbers for oil continue to be strong,” he wrote in an email note.
Before the sanctions on Iran, Saudi Arabia gave assurance that it had enough spare capacity to cover potential supply disruptions.
Saudis and other OPEC members are “stunned and angry about President Donald Trump’s waivers on Iranian oil exports,” Flynn wrote, adding that this created an “epic battle” between OPEC and Trump, leading to an oil price crash.
It is still unclear whether OPEC will give in to Trump’s tweet and back off a production cut in December.
Citi analysts predict that the global oil market will tighten up soon.
“We think there is only around 500,000 barrels of spare capacity left in the global market,” stated the Citi note. “With the Iranian sanctions pulling around 1 million off the market already, a tight market will likely remain.”
This situation is driving the current volatility in the oil price. In the last six weeks, oil prices went from four-year highs to a bear market. Between the summer and the fall of this year, the West Texas Intermediate (WTI) crude oil increased by about 15 percent and since then came down to $55 per barrel, losing more than 20 percent. And the price of Brent crude first increased about 20 percent reaching $87 then dropped to $65 a barrel.
“Such volatility instead reflects changing perceptions of whether there is or isn’t ample supply, when production looks increasingly constrained,” the Citi report said.
The recent crash in oil prices is good for the U.S. economy. However, too low of a price may hurt the economic growth in the long run.
“The U.S. energy industry is a big part of the U.S. economy, and the world is really looking to us to supply the globe over the next few years,” Flynn wrote.
The International Energy Agency said in its latest World Energy Outlook that the United States will be the biggest contributor to the oil market, accounting for nearly 75 percent of global oil production growth in the period to 2040.