Crude Prices Near $70/bbl Due to OPEC Compliance, But Saudis Say It's Still Not Enough to Spur Investment

Thursday March 22, 2018

A statement on Thursday from Khalid al-Falih, energy minister for Saudi Arabia, about the Organization of the Petroleum Exporting Countries (OPEC) likely sticking together into 2019 to help tighten the crude market caused West Texas Intermediate to rise 79 cents to $65.09 and Brent to climb 73 cents to $69.64 per barrel.

This was despite stock market and commodities losses that resulted from U.S. president Donald Trump signing a presidential memorandum on Thursday that could impose tariffs on up to $60 billion of imports from China.

Moreover, Morgan Stanley believed "There are sufficient reasons to expect oil prices to strengthen further from here, and we stick with our [Brent] $75 per barrel call for Q3"; the reasons for the bank's optimism include oil prices being sensitive to geopolitical tension due to the inventory cushion diminishing, and an anticipated surge in demand once the peak refinery maintenance season is over. 

Al-Falih told Bloomberg television that in the 18 months OPEC announced that its members were coming together to "bring balance and stability" to the crude market, "the results speak for themselves: everybody is happy, and everybody intends to finish the job, which is to bring us back into balance, but more importantly to stay on the job afterwards and work together and be responsive to what the market needs.

"I think we'll be on together in 2019 and beyond...it could be to cut, it could be to increase production as the market requires."

However, not everything Al-Falih stated was upbeat: he went on to speculate that "two thirds of the global glut have been removed," but he added that because of U.S. shale and the recovery of countries such as Libya and Nigeria, "when exactly we finish the job is not clear."

Even more puzzling with regards to how this could have been ignored by traders, when asked what he thought of $70 crude as a fair market price, al-Falih replied that "So far, the prices we've seen have not brought back the investments we need; we're still $1 trillion in investment levels below where we were before the downturn in oil prices, so that tells me that the pricing signals that have come out of the recovery have not been sufficient."

Presumably, traders were also buoyed by the latest feel-good announcement from OPEC that its allies achieved 138 percent of pledged output reductions last month, up from 133 percent in January and the highest since the output reductions began in January 2017.

Also, oil inventories in developed countries were 44 million barrels above the five-year average, the closet the cartel has yet come to achieving a proper supply and demand balance: "Stocks can now be considered as close to normal levels," an OPEC source said.

Although the Saudis recently declared that they see a stable market ahead, the energy minister should prepare for further disappointment: several noted analysts. including Julius Baer, firmly believe that stocks will soon rise again, meaning we may have already seen the highest crude prices of 2018.