Saudi Arabia Wins Big As Trump Cracks Down On Iran

The White House sent a bullish jolt into oil markets this week with a surprise decision to eliminate their waiver program for key buyers of Iranian crude. To review, the Trump administration had granted free passes to large buyers of sanctioned Iranian oil in order to keep prices in check while OPEC+ is working to tighten supplies. Our strong expectation was that Washington would continue this policy as Trump hates high gasoline prices and the program didn't hurt him an ounce politically. Nevertheless, Trump's State Department is ending the waivers in a push to move Iranian exports to zero as soon as possible. Refiners in India and China- Iran's two largest customers- will be particularly hurt by the move which gave oil a $2 boost and sent short positions running for cover. Brent time spreads rocketed higher suggesting physical traders are particularly bullish on near term market fundamentals as refiners scramble for spot barrels.

We were surprised by the White House's move as it clears a very easy path to the higher gasoline prices that President Trump loathes. Trump's team obviously considered this prior to the move, however, and comments from the US State Department and Saudi leadership on Monday insisted a new cooperation between the two nations will keep oil prices in check. Trump himself apparently feels confident oil prices will stay under control Tweeting "Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil." Meanwhile Saudi's Energy Minister Khalid Al-Falih added "in the next few weeks the Kingdom will be consulting closely with other producing countries and key oil consuming nations to ensure a well-balanced and stable oil market, for the benefits of producers and consumers as well as the stability of the world economy." Unfortunately for Trump, rhetoric from Iran was highly contentious stating they will continue to sell crude and may even close the Strait of
Hormuz if their ability to trade is impeded.

We think the termination of the waiver program will mean that the Saudis will begin pumping more oil in the near future and ultimately end or drastically modify the current OPEC+ supply cut regime. This scenario would represent a massive coup for Saudi foreign policy by allowing them to sell more barrels, take market share from their arch geopolitical foe Iran and do it without crashing prices. After getting hoodwinked by Trump into pumping too much oil in 2018, it appears the Saudis are about to reap the lion's share of rewards from Washington's latest pivot in the Middle East. MBS will essentially be having his cake and eating it too. Bloomberg estimates Iran exported 1.1m bpd of crude oil and condensate in the first two weeks of April, which is almost exactly equal to the amount of spare capacity the Saudis claim to have ready on short notice.

This story will obviously require ongoing attention, but our knee jerk reaction is that Washington may have underestimated the extent to which they have just tightened an already tight oil market. In the short term, drivers can expect to pay more dollars, euros and pounds at the pump, with some of it going to the Saudis.

Quick Hits

- Oil markets gapped higher this week on the news that the US would be ending its Iran waiver program. The administration is now taking a hard course to push Iranian exports to zero bpd, and Iran is responding with threats to disrupt trade in the Strait of Hormuz. The result so far has been a jump from $72 to $74 for Brent while WTI levitated from $64 to $66.

- Meanwhile spread markets are screaming that the recent news is not some transient bullish threat. The prompt Brent 6-month spread (the differential of the June versus the December contracts) moved from $2 backwardated to $3 backwardated suggesting refiners could struggle to source Brent barrels in the immediate term. Spread markets should be a good place to keep watch on to see just what kind of bullish legs this story will have.

- Bloomberg currently estimates Iranian production north of 2.5m bpd and exports near 1.1m bpd. Saudi Arabia is expected to start pumping an extra 1m bpd and the UAE is expected to start pumping an extra 500k bpd almost immediately in order to shore up supplies.

- The IEA released a note this week describing oil markets as well supplied and actually seemed more concerned about the fragile state of global economic growth than the pending road blocks for Iranian shipments. The organization estimates current global spare production capacity at 3.3m bpd with 2.2m bpd in the hands of the Saudis while Iraq, the UAE and Kuwait combine for about 1m bpd.

- Not to miss a week in headlines, Venezuelan output reportedly fell below 1m bpd this week

- Hedge funds were steady buyers of crude oil last week increasing net length in ICE Brent from 358k contracts to 380k contracts while NYMEX WTI net length jumped from 276k to 303k. Both marks are well within their 2yr ranges and should have more room to the upside as long as a compelling bullish narratives persists.

- Away from the oil market, US stocks touched a record-high this week with help from better than expected Q1 earnings reports. Oil's bounce also provided a tail wind for risk markets leading to broad macro buying.

DOE Wrap Up

- US crude oil stocks fell 1.4m bbls last week to 455m and are higher y/y by 5% over the last four-week period.

- The US currently has 28.5 days of crude oil supply on hand.

- Crude inventories in the Cushing, OK delivery hub fell 1.5m bbls to 44m.

- US crude production came in at 12.1m bpd last week for a 100k bpd w/w decline. The US crude oil rig count currently measures 825 which is lower by 60 since the beginning of the year.

- Trading flows continue to show a serious effort from OPEC to reduce supplies in the US. US crude traders imported 6.0m bpd of oil last week after averaging 7.8m bpd in 2018. US crude exports printed 2.4m bpd last week which was slightly lower than the 2.65m bpd average so far this year.

- US gasoline inventories fell 1.2m bbls last week to 228m and are lower y/y by 2% over the last four weeks.

- The most bearish set of data in the US crude complex in our view is still the lack of demand. US refiners processed 16.1m bpd of oil last week which was flat w/w. Refiner demand has averaged around 16.3m bpd so far in 2019 which is lower y/y by about 250k bpd.

- The US currently has 24 days of gasoline supply on hand which is slightly bullish versus seasonal norms.

- US gasoline demand + exports printed 10.0m bpd last week and has averaged 9.80m bpd so far in 2019 which is lower by about 125k bpd y/y.

- US distillate inventories fell by about 400k bbls last week to 128m and are flat y/y.