One wonders if Trump tweets are nothing other than algos switched on sending out blasts if prices of certain assets hit a limit, whether it be for Oil or the dollar. As soon as Brent flirted with $80/bbl, president Trump decided to send a "warning" tweet to the Middle East asking to get prices down.
It is ironic that OPEC market share is now less than 50% of world oil production, yet Trump takes no accountability for his own musings sanctioning other producers causing a ripple in the global supply chain. If the price of gasoline and oil is such a headache for the Republicans going into mid-terms, one wonders why they do not just take a less-aggressive stance on geopolitical rants.
OPEC and non-OPEC members (Russia) held a meeting yesterday in Algiers to discuss quotas. As expected, they decided to leave them unchanged post June's agreement to raise supply. Saudi Energy Minister Khalid al-Falih said that Saudi had spare capacity to increase output if need be, whether to replace lost Iranian barrels or to meet increased demand, but for the time being, saw no need. This is quite prudent, as there is enough oil out there to meet refinery demand.
Russian Energy Minister Alexander Novak echoed similar comments that no further output increase was necessary, but referred to previous communication that they can easily add 300,0000 barrels per day more if need be. In summary, there is more oil out there to hit the market, should there be a need.
All About Demand
The canary in the coal mine is not supply, it is demand. We are fast approaching the end of the Atlantic Hurricane season (end September officially) and the next few weeks of DOE inventory data might be distorted due to hurricane / infrastructure outages post evacuations. The key thing to monitor will be distillate demand data starting from October onwards, going into the fourth quarter of 2018 and first quarter of 2019.
It is clear that there has been a slowdown in global emerging market demand for oil, given their respective currency collapses vs. the dollar. It remains to be seen how far and dragged out the Chinese trade war with U.S. will be, as it will have implications for Chinese GDP growth -- plus it is impacting several commodities.
Given the uncertainty on the demand side of the equation for oil, OPEC and Russia made the sensible decision to wait and see before agreeing to raise more production, despite media pressure from the U.S., which seems nothing other than musings to keep the press entertained.
We all know the taps can be turned on for at least 1.8 million barrels per day (1,500,000 from Saudi and 300,000 from Russia), assuming Iran stays put at their current 2.1 million barrels per day. It remains to be seen how many other nations displace Iranian imports to appease the U.S. We know China will not bow down to U.S. pressure, so any lost Iranian barrels can be made up by China.
Even if the market stays pat where it is right now, if we get past Hurricane season without any permanent loss of barrels, given the demand prospects easing and distillate inventories above the five-year average and no longer in deficit, the risk/reward in oil seems to point to the downside. One caveat is the Fed meeting this week on September 26: If there is any hint of easing their gradual rate hikes -- causing the dollar to fall and implying lower-for-longer rates and further QE accommodation -- then perhaps oil can rally along with other risk assets, but still relatively less, as there is much more upside in base metals like copper, iron-ore and steel. China can also surprise the markets with further stimulus going into Q4 to offset the tariff pressures on their economy.
In short, there seems to be a lot of moving parts. But it is important to draw the distinction of which markets are fundamentally "tight" and which markets "loose." Once the macro news flow and central bank shenanigans settle down, investors need to be positioned in the former, not the latter. Oil, unfortunately, fits in the latter camp.
There are pockets of value in select oil service stocks that are seeing margin expansion and continued contract awards that can benefit even in a flat oil price environment. Despite being cheap, oil majors can be a source of funds as they will underperform the broader market. Their dividend yields are attractive for income funds, but price appreciation will be capped given the continued cost pressures in a flat-to-lower oil price environment.