As Oil prices retrace from their summer slums, it is important to note that Brent Oil prices have not really broken out of their $38-$46/bbl. range. We are just now at the top end. As winter approaches, which usually sees a pick-up in winter hemisphere demand, heating oil season tends to be positive for the Oil spectrum. But this year is a bit different given the pandemic as more countries embark on the lockdown as the only alternative to restrict the strain on their hospital infrastructure and staff. What this does is limit travel and demand in general. Jet fuel has been the victim of the demise in Oil prices, even if other sources of Oil demand have been gradually recovering, we are not close to full throttle yet. But as prices recover there is more chatter about what OPEC+ alliance will do with regards to extending the 7.7 mbpd of Oil still sitting out of the market on the side-lines.
It is important to note that if it were not for this alliance, namely Saudi Arabia, UAE and Russia, to take this Oil off the market, prices would not be anywhere close to being where they are today. That is a fact and everyone knows it. They are hoping to keep production on the sidelines, giving the market time to "adjust" and demand to come back. They are buying time. Now as prices touch $45/bbl.+, and Asian demand recovered, there is a lot of chatter about what the alliance will want to do at their next meeting in December. These producers have had to watch their production cutbacks eat into less revenues and market share for their product. They are eager to start producing and making some money back. They are just waiting for the signal to do so. After all, why should they sit on the sidelines when everyone else seems to be enjoying the recovery in Oil, i.e. shale?
There has been a little chatter about how there was a bit of tension between United Arab Emirates and Saudi Arabia, which could potentially lead UAE to break away from this alliance. Each country has its own debt deficit and funding needs, so it only makes sense for each to think of their own situation. But if anyone knows anything about this region, the ties between the two go way back, more than Oil, there is a deep-rooted connection and it will take more than just Oil to break away. Moving away from the alliance means moving away from all that they stand for and makes it highly unlikely. This cannot be just about Oil production. It is about geopolitics, finances - the bigger picture in the region. Russia is a different alliance member and can do what it wants to an extent.
As Oil prices plunged this year, Middle East producers have cut their bloated spending, raised taxes and are slowly trying to find ways to raise more money in the interim. They have tapped into the Bond markets via sovereign and corporate debt issuance. Saudi Aramco this week raised $8 billion in bond sales, the second time in two years after the $12 billion last year. It refuses to touch its cash pile of $75 billion kept to pay the dividend, and rather raises more debt than tap into that. Abu Dhabi issued a $5 billion bond this September. Dubai raised $2 billion in September, including Qatar and Bahrain. The Arab countries have been on a debt raising binge. They are trying to diversify their Oil dependent system, but that takes time and investment, for now Oil is their main cash cow.
As vaccine optimism fades given we could be about six months to even a year before everyone gets inoculated, or be forced to. It will be some time before people feel safe to travel again. Hence Q12021 can still be tricky if the Chinese and Indian demand is not enough to offset the slowdown in the West, and this could lean on Oil prices. Just like the Fed, the alliance is too scared to do what really needs to be done to get this market sorted, once and for all, the great reset. Forget controlling supply, let the Oil price find its true floor and equilibrium. How a commodity should be in reality. It may be scary but once and for all the weak, high cost players, will get flushed away and true powerful/cheap cost players will survive and enjoy the massive rally that ensues afterwards. It is better than hoping that each member does not cheat.
Until anyone is brave enough to do that, Oil price rally will always be in fits and starts depending on the time of the year, as there is no shortage of supply and demand will never go back to the hay days of 2008 when the stars were all aligned together.
