Energy Prospectus

WTI is hovering just below $59/bbl as this is posted.

(Bloomberg) -- Saudi Arabia led fellow members of the OPEC+ coalition to reaffirm their commitment to output cuts, but conceded they should defer until June the decision on whether to extend the curbs.

A committee of the most influential members in the 24-nation alliance, which includes Russia, Iraq and the United Arab Emirates, agreed to go beyond their pledged supply curbs in the coming months. They also recommended canceling a planned April meeting, saying it would be too soon to determine whether the cuts should continue into the second half.

The change in timing, which still needs to be agreed by the wider coalition, reflects what the committee described as “critical uncertainties” in the oil market, with U.S. sanctions threatening to remove significant supplies from Iran and Venezuela. It’s also the latest sign that Russia, not Saudi Arabia, is setting the agenda for a group that controls more than half of global crude production.

When OPEC and its allies agreed their production cuts in December, Saudi Energy Minister Khalid Al-Falih was initially in favor of a decision to extend them into the second half of 2019 at the planned April meeting. Speaking before talks in Baku, Azerbaijan on Monday, he acknowledged that “April will be premature to make any decisions.”

Russia and Iraq, the pact’s two other major producers, had pushed back against committing to rolling over the OPEC+ cuts agreement so soon. Russian Energy Minister Alexander Novak said on Sunday that uncertainties arising from production in Venezuela and Iran make it difficult for the coalition to determine its next step before May or June.

Read More: https://www.investing.com/news/commodit ... nd-1810330

MY TAKE, which has not changed since the beginning of the year, is that Saudi Arabia wants $75/bbl Brent. That is the minimum oil price needed to balance the Saudi's budget. At $75 Brent we should see WTI futures trading between $65 & $70, which is just above what I believe is the "Right Price" for oil based on the fundamentals.

WTI is currently above what I am using in all of my forecast/valuation models.

WASHINGTON (Reuters) - The United States aims to cut Iran’s crude exports by about 20 percent to below 1 million barrels per day (bpd) from May by requiring importing countries to reduce purchases to avoid U.S. sanctions, two sources familiar with the matter told Reuters. < If "Team Trump" follows thru on this threat, WTI will zoom over $65/bbl in Q2.

Read More: https://www.reuters.com/article/us-usa- ... SKCN1QU35V

It appears to me that Saudi/ OPEC wants to see the Trump card on sanctions played before they show their hand.

Saudi NEEDS $75 Brent. If Trump keeps the pressure on Iran and Venezuela, OPEC+ can ease up on their production cuts and still get Brent to $75.

There are several difficulties with OPEC's ability to control oil prices:

1. Speculators / Computers set the daily price of oil by trading oil on the futures market based on formulas. This is getting worse.

2. A small difference in supply & demand can have a BIG IMPACT on the oil price. For example, when supply exceeded demand by less than 2% we had everyone calling it a "glut". Today, supply & demand are in balance, but clearly we are heading rapidly to an under-supplied global oil market. Global demand will increase by 1.5 to 2.0 MMBOPD from Q1 to Q3. It happens each year.

3. Crude oil inventory reports are (a) not very accurate and (b) not timely. For example, if Saudi ramps up exports it takes up to 90 days before it shows up in inventory reports. EIA's weekly storage reports are just "Wild Ass Guesses" based on formulas and outside of the U.S. the accuracy is much worse.

4. Last but not least, oil price swings almost always overshoot the mark ("Right Price"). I think $65/bbl WTI is now the "Right Price", but my SWAG is that Raymond James' forecast of $90/bbl WTI in Q1 2020 is likely to happen just because demand will exceed supply over the next three quarters and the speculators will drive up the price in the futures market.