Scraping the Barrel
Oil prices are trading lower after a much more significant than expected build on the API US oil inventory report amid speculation that Russia my ease production cuts from July. The irony of today's build is that it provides a stark reminder to Russia – as well as the market in general – that while thing “feel better" out there, by no means is everything fixed. This was underscored by the API report’s lingering supply concerns.
With the oil market assumed to be rebalanced at a much quicker pace than anyone expected, investors are now attempting to digest the outcome of the upcoming OPEC+ meeting scheduled to take place on June 9. But, as is often the case during a run-up to an OPEC+ meeting, the focus is squarely on Russia's commitment – understandably so given they’ve historically been the laggard within the OPEC+. They’ve also tended to be the most vocal compliance detractors, continually lobbying for a larger piece of the production pie.
Cognizant that higher oil prices might slow or even reverse production cuts, particularly in the hardest-hit US producers, Russia's oil industry does not want to give up any market share to US shale, leaving the market to speculate if Russia's discussion on easing production cut from July will eventuate.
While this is entirely consistent with the terms of the new OPEC+ agreement, the fear is that tensions between Russia and Saudi Arabia could re-emerge at the OPEC+ meeting in June.
Whether Russia is merely jockeying for position before pulling up a seat at the table on June 9 or will break compliance is the real question. But the lead up to the OPEC+ meeting will be dotted with the usual unsourced Russian rumors, so buckle in because there’s bound to be a headline bump or two during the next week or so.
A meeting between Russia's Energy Ministry and Russian producers proved inconclusive on extending the initial phase of deeper production cuts. Still, common sense suggests that recent turmoil in oil markets underscores the risk of failing to present a unified front.
The duration of the existing agreement (which provides for phased production cuts into April 2022) and the additional near-term cuts planned by Saudi Arabia and other Gulf producers show that OPEC+ participants are well aware of the need to address the pressure on oil fundamentals and market sentiment. On that view alone, the meeting should not prove to be the basis for any significant concerns, but as is so often the case, Russia remains the wild card.
Risks remain in the near-term: higher oil prices might slow or even reverse production cuts, and demand remains sensitive to negative news on the trade war and of the coronavirus front.
The IEA's World Energy Investment report flags a 20% drop in energy investment this year. For oil, capex is estimated to fall 32%, driven by lower activity levels rather than deflation (costs down just 5%). The IEA suggests under-investment this year could lead to an oil supply shortfall of 2.1mb/d in 2025, or as much as 9mb/d if capex remains flat in the coming years.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll