If you need any evidence to stop making a fuss about OPEC and their official, highly-publicized meetings, do not look further than the one held recently in Vienna on June 22.
After Saudi Arabia reiterated the "importance of OPEC partnership and agreement" and "keeping the deal alive," Saudi energy minister Khalid al-Falih went to great lengths to describe the importance of the decision reached by its members.
Diplomatic rhetoric aside, the latest Saudi June export numbers showed monthly exports of 7.181 million barrels per day, a monthly increase of 524,000 barrels per day. Hold on: Wasn't the decision to raise output "agreed" on June 22 supposed to take effect in July?
Perhaps they had a crystal ball as to what the outcome of the Vienna meeting would be. Or Saudi Arabia knew that they are the ones calling the shots, but just needed to give the illusion of listening to its partners and appear to be "diplomatic" to the rest of the world.
We have to ask: How long can one look at analysts and reporters in the eye with a straight face after such an outcome of events?
U.S. President Donald Trump was not pleased with the outcome of the OPEC meeting, phoning his BFF over the weekend and explaining how he wanted them to increase oil production by two million barrels per day, as the agreed production was not enough to make up the shortfall from Iran and Venezuela.
Trump blamed OPEC for "prices being too high." That is an even more comical notion, given that Trump is the one who wants to strip the European Union and China of all its exports, taking the extra 1 million barrels per day out of the market. Even Hollywood can't write this saga any better, even if they tried. Grab your popcorn, this one is going to be a blockbuster!
Will Iran's trading partners give in to Trump's bullying attempts to stay off Iranian oil? India has already said it will buy Iranian oil with rupees. Turkey will do what is best for its economy. Russia has a lot to lose given its investments with Iran, same with Japan and South Korea asking for waivers.
Since yuan-denominated oil contracts started trading in March, do we really think China will do what Trump thinks is "fair"? It would be naive to think so. The importance of oil being traded in USD is shifting. The wheels have been in motion for some time. The U.S. just does not want to accept it.
But does it really have the economic might to convince China to hold off on potential energy business of $40 billion a year with Iran, if the EU caves in?
Either way, it would be naive to assume that all 1mln bpd of Iranian oil will be off the market.
Iran, Iraq and Venezuela opposed the production increase, but perhaps do not really have a voice at OPEC.
Perhaps the more pertinent question is whether there is the need for OPEC in the first place, given the show really is being run by Saudi Arabia, Russia, and United States.
As opposed to giving the less important members concessions and reconciliatory prizes, perhaps it would best to just make it official that the cartel should be SauRuPec, with the strings being pulled by United States.
More oil is coming
The fact of the matter is that more oil is coming. The million-dollar question is how much.
A chart from the International Energy Agency (IEA) shows OPEC and Russian oil output, and how much each country could potentially increase given their capacity. The spare capacity numbers are debatable, but assuming the numbers are in line, Saudi Arabia and Russia together could increase between 1.5-2 million barrels per day.
The bulls suggest that the maximum they can raise is close to 1 million bpd, hence we have analysts calling for $100/bbl oil if the worst-case scenarios line up. Iran loses all its exports, approximately 1 million barrels per day, Venezuela down 1 million bpd, Saudi Arabia only pumps 700,000 bpd, Russia by another 300,000 bpd, U.S. growth stays as is. It is easy to assume such euphoric scenarios when one just looks at supply considerations.
What about the demand side of the ledger? After all, if we are truly worried about a global economic slowdown that is being priced in by markets across the board, oil cannot keep growing at a healthy 1.4-1.5 million bpd.
Even Houdini cannot pull off that stunt. The reality of accounting is that the left side eventually equals the right side.
Months from now, when we start to see $3/gallon eating into U.S. consumer demand or perhaps global demand numbers from emerging markets given their collapse over the last few months, we can expect to see agencies revise their numbers lower.
There has been undue stress seen in emerging markets given the high USD eating into their FX reserves.
But when the actual numbers are reported, as usual printing after the fact, oil traders need to ask themselves: will oil still be trading close to $80 per barrel?
