RBC Capital - Comments on Oil Market April 3

[dan_s]

Saudi Arabia/OPEC Update: Oops!... I Did It Again

Analysis of the Saudi-led OPEC+ Production Cut Ahead of Tomorrow’s JMMC Meeting

 Saudi Arabia’s oil minister cemented his reputation as the Prince of Plot Twists by announcing
a surprise unilateral reduction of 500 kb/d in advance of tomorrow’s Joint Ministerial
Monitoring Committee meeting. Combined with additional reduction pledges from Russia and
a selection of fellow OPEC and non-OPEC members, the May reduction at least on paper will
exceed 1.65 mb/d on top of the 2 mb/d cut announced in October. The full extent of the
voluntary adjustments are not entirely clear at the time of writing, but our initial estimates
based on today’s announcements would indicate the real effect could be around 700 kb/d from
the OPEC-10 group.

 While we did not forecast such a substantial cut in advance of this JMMC meeting, we
certainly saw Saudi Arabia keeping it as a reserve option as they have expressed clear
concerns about aggressive Fed action, macro uncertainty and what is seen as an overly
bearish bias in the market. We also heard skepticism about SPR refill pledges, well before
Secretary Granholm indicated that any repurchases would be unlikely this year. We did not
subscribe to the view that a full year deal meant that there would be no additional supply
reductions, but rather that there would be no early production increases based on improving
economic data. Today’s move, like the October cut, can be read as another clear signal that
Saudi Arabia and its OPEC partners will seek to short circuit further macro sell-offs and that
Jay Powell is not the only central banker that matters.

 This decision will certainly not be welcomed by the White House – which had called the move
ill advised – but the bottom line is Washington and Riyadh simply have different price targets
for their key policy initiatives. Since August, when Washington did not get the OPEC increase
it was seeking after President Biden’s trip to Jeddah, it has been apparent that Saudi Arabia is
prepared to endure increased friction in the bilateral relationship. We have made several trips
to the Kingdom in recent months and one of the key messages has been that the United States
is now seen as just one of several partners, and that the bilateral relationship with China is
rising in importance. China is already the Kingdom’s most important trading partner and the
country’s economic future is seen as residing in the East. Beijing has also been described as a
less demanding partner than Washington – not making ever-changing oil asks or seeking full
alignment with foreign policy aims.
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MY TAKE: The relationship that the U.S. "had" with Saudi Arabia is EXTREMELY IMPORTANT to our economy that runs on oil. President Biden's Team of Idiots has destroyed the relationship. If U.S. shale-oil production cannot keep up with demand for oil-based products we may be forced to beg for more OPEC production. We should be building the Keystone XL pipeline today. THIS IS A NATIONAL SECURITY ISSUE.