EMEA News
Crude Climbs But Saudi Goal for Higher Prices Won't Meet Their Economic Ambitions
Strong member compliance for the Organization of the Petroleum Exporting Countries' (OPEC) crude production cuts, which has been championed most vocally by Saudi Arabia, is said to have supported another day of gains in the crude market: West Texas Intermediate on Thursday settled up 50 cents to $68.43 per barrel, while Brent rose 52 cents to $73.88 per barrel.
However, while the ongoing uncertainty about whether the U.S. will reimpose sanctions against Iran also contributed to the gains, prices were capped by Wednesday's data showing a 6.2 million barrel jump in crude inventories last week, and U.S. production hitting a new weekly record of 10.62 million barrels per day (bpd), ahead of the Saudis and just below Russia.
These dynamics caused Rob Thummel, portfolio manager at Tortoise Capital, to remark, "The margin for error right now is just so low in the oil market that you can't just take supply off the market."
The most recent cause for trader celebration with regards to OPEC is Reuters data showing that the cartel and its allies pumped around 32 million bpd in April, slightly below its target of 32.5 million bpd, due largely to Venezuela's rapidly deteriorating production capabilities.
Even though such figures are supposedly contributing very rapidly to a rebalance of global supply and demand - the reason OPEC launched its cutbacks in the first place - all indications are that the cutbacks will continue indefinitely, which has sparked analytical observations ranging from the notion that maybe the rebalance isn't as strong as thought to the argument that many Middle Eastern countries need higher oil prices to help their troubled economies.
The Saudis have intimated as much, in order not only to improve their economy but to generate enough wealth to diversify away from oil as their main economic driver; this much was reiterated on Thursday in a column by John Kemp, market analyst for Reuters.
However, Kemp posited a troubling possibility: while current high crude prices have enabled the kingdom to stabilize its drawdown on foreign reserves, it's questionable whether even further crude price gains will enable it to diversify: "Economic transformation will need hundreds of billions of dollars, and financing can come only from the kingdom's internal resources, or in the form of foreign loans, equity sales or direct investment."
While Kemp thinks the Saudis will keep the cutbacks going for as long as possible, it's unclear whether other OPEC members and allies will ultimately play along; plus, it's also uncertain if the appetite for Saudi crude on the world market will continue to be sustained - and news on Thursday from Sinopec, Asia's largest refiner, suggests that it won't be.
An unnamed official from Sinopec's trading arm Unipec told Reuters that it plans to cut the volume of Saudi crude oil it loads in June by 40 percent for a second month, after the price of the kingdom's key grade rose to a near four-year high.
By contrast, Sinopec has increased crude imports from the U.S., Brazil, Iran, Colombia and Iraq; the official said that Saudi crude remains overvalued compared with other Middle East grades.
The depiction of the Saudis as duplicitous manipulators of oil prices seems to be gaining ground this week: earlier, Bloomberg exposed the Saudis' argument that the OPEC cutbacks should continue in order to encourage global production investment as false, pointing out that industry spending in recent years will ably fulfill future demand.
