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Saudi Power Over Oil Prices Is Limited

Saudi Arabia

Are you getting bored of the oil market yet? Traders are. Brent crude achieved just a $3.12 range in the ten trading days ended March 12th, representing its most narrow band since May of last year. While headlines have screamed about the impending bearish doom or bullish boom they happen to see ahead, the real story has been that oil markets have substantial buffers on both sides of the range. Option traders see the trend persisting in the near term with the straddle expiring April 25th worth just $5.00.

This week’s key headlines have fit neatly with the sideways trend. On the supportive side, Monday’s Saudi announcement of larger than expected exports cuts in April (which are still focused on the US) gave the market a bullish jolt. On the resistance side, the most recent IEA forecast predicting an additional 4m bpd of US supply growth over the next five years points to the limits of OPEC’s ability to manage the market higher. We continue to adhere to the idea that OPEC+ can absolutely manage downside risk in the market but they’ll have trouble creating genuine upside risk. For fun, we’ll even define this numerically offering that OPEC+ can keep prices above $50, but they can’t push prices over $75 without a parallel bullish narrative.

So where will oil’s next big move come from? For upside, we’re still believers in the idea that OPEC production cuts, dovish central bankers and a US/China trade deal will serve as potent bullish factors. There seems to be a bit of extra juice in the OPEC component of the bullish triumvirate for now as exports from Iran, Venezuela and Nigeria look particularly tenuous. Unfortunately for bulls, these themes are almost entirely priced into markets now and there will have to be some substantial data surprises for one of them to generate another leg higher for prices. Perhaps some extremely sharp US inventory draws could do the trick.

On the downside, global trade woes, weak refiner demand and growing US supplies will continue to keep a lid on prices. This week’s IEA forecast on US crude supplies topping 13.5m bpd by 2024 was alarming and will certainly mitigate upside risk for prices if it comes to fruition. On the economic side, LNG flows have revealed some of the stress that US/China tariffs are putting on economic activity as only one China-bound US tanker has been delivered in 2019 after averaging about 2.5 per month in 2017 and 2018. On Tuesday US trade…




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