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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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$100 Oil Is Back On The Table

Oil prices will rise to $100 per barrel if Saudi Arabia gets its way.

Only a week ago, news surfaced that Saudi officials were quietly hoping to push oil prices up to $80 per barrel, which would help boost the valuation of Saudi Aramco IPO. But why not $100 per barrel?

Reuters reports that Riyadh would be fine with prices rising that far, which lends weight to the notion that OPEC will keep the production cuts in place even as its mission to drain surplus oil inventories around the world appears to be largely “accomplished.”

OPEC and its non-OPEC partners are even considering yet another extension that would push the cuts into the middle of 2019. But with inventories back to average levels and expected to fall for the foreseeable future, the production limits would surely push the market into a deficit. The over-tightening, presumably, would lead to higher oil prices…just in time for the Aramco IPO.

OPEC just posted its fifth consecutive month in which it recorded a new record high compliance rate with the production limits. In March, according to Bloomberg, the compliance rate surged to 164 percent, a new high, up from 148 percent in February. Unsurprisingly, output fell in Venezuela, but Saudi Arabia also chipped in further reductions.

Two industry sources told Reuters that behind closed doors, Saudi officials have considered $80 per barrel, or even $100 per barrel, as sort of unofficial price targets. “We have come full circle,” a third high-level industry source told Reuters. “I would not be surprised if Saudi Arabia wanted oil at $100 until this IPO is out of the way.”

“Saudi Arabia wants higher oil prices and yes, probably for the IPO, but it isn’t just that,” an OPEC source told Reuters. After the IPO, Saudi Arabia would still want prices to remain high, which would increase the revenues needed to fund the long-term transformation of the Saudi economy pushed by Crown Prince Mohammed bin Salman. “Look at the economic reforms and projects they want to do, and the war in Yemen. How are they going to pay for all that? They need higher prices,” the Reuters source said. Related: The Bullish And Bearish Case For Oil

Indeed, Saudi Arabia is still posting large fiscal deficits, which, if left unaddressed, present a long-term threat. Saudi foreign cash reserves are down to $488 billion, down a third from their peak in August 2014 at $737 billion, although to be sure, the pace of drawdowns has slowed. “Their breakeven is around $85 per barrel,” according to Francisco Blanch, global head of commodities research at Bank of America Merrill Lynch, citing a reason why they might continue to favor higher prices.

The risk of over-tightening the market, of course, is that it sparks an even greater response from U.S. shale. For now, a shortage of pipeline capacity in the Permian might insulate OPEC from the worst, but those bottlenecks will eventually be resolved. The longer-term danger for Saudi Arabia from pushing prices too high is structural demand destruction – expensive oil will force more and more motorists around the world to switch over to EVs. Everyone agrees peak oil demand will eventually arrive, even if the precise date is hotly debated, but a spike in oil prices could accelerate that transition.

OPEC is set to meet in Jeddah, Saudi Arabia, on Friday to consider options for what to do next. But changes to the current agreement, or even a strategy update, probably won’t be revealed until the official meeting in June. Related: IMF: Expect Oil To Fall Below $60

But the mere talk of $100 per barrel is likely to put upward pressure on prices. During midday trading on Wednesday, both Brent and WTI were up more than $1 per barrel, hovering near multi-year highs. And the signals being sent by multiple OPEC officials suggest that the group will opt against phasing out the cuts at its upcoming meeting. “Despite an oil price of over $70 per barrel and the fact that the oversupply has been eliminated, a phase-out of the production cuts will not be on the agenda,” Commerzbank oil analyst Carsten Fritsch said.

Saudi Arabia’s motivation for higher oil prices will magnify the influence of existing trends in the oil market. That is, the shrinking inventory surplus, strong demand, and geopolitical tension are all working together to push up benchmark prices.

The resolve of Riyadh to keep OPEC in line for another year significantly raises the odds of further price increases. Whether we get to $100 per barrel remains to be seen.

By Nick Cunningham of Oilprice.com

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  • Neil Dusseault on April 18 2018 said:
    Wow...here we go again:

    Oil advances $2/bbl in a single day based on a mildly bullish report from EIA (after rising 2% since yesterday's mildly bullish API report) when approx. 1 1/2 weeks ago WTI was $62/bbl and based on overwhelmingly bearish news it would have headed for $60 last week but that was quickly averted with geopolitical tensions...and oil bulls are still not happy?

    What about the fact that there is an approx. $25/bbl difference between WTI's low's (May or June '18 contracts) and the fresh highs it keeps hitting? So, in February 2016 when oil was nearing its lows, the Saudis said they can still pump and profit at $10/bbl (to flush out U.S. shale) and when WTI was in the $30s U.S. shale replied, "Just give us $40/bbl" and then we did; then $50/bbl was a "psychological barrier" but it too was surpassed all in 2016.

    Russia's oil minister Alexander Novak has repeatedly said that they can survive on $40 oil forever, yet $60 was seen as the number that would really bring back U.S. shale and it certainly has--all while the Saudis called for $70 oil and Brent has already been above that--in fact, the very moment Brent crossed $70/bbl, the Saudis then called for $80/bbl just as all this geopolitical action was occurring within the past 2 weeks.

    Now, WTI may cross $70/bbl this very week and suddenly as fast as we're getting to $80 oil that isn't good enough? I'm just curious, what is any producer or any trader going to do with $100/bbl that they couldn't do when WTI doubled from $26.05 in just a few months in 2016?

    Please do not insult yourself that debts need to be paid, and extra money needs to be in place for capital expenditures. That's already been priced in tens of dollars per barrel ago. No, if you can't balance a budget as an oil producer or make do and be satisfied as a trader at these prices then just know that the entire world cannot sustain these high prices and alternatives to plastic packaging to mass transit (as opposed to jet fuel), EVs, solar, wind, etc. anything is possible to avoid empowering some of the world's most dangerous people: The Russians and the Saudis.

    By the way, who do you think is going to do the bidding from where we are now to $80 or $100? Traders: Who all have a choice...you can make just as much money shorting the market on a "correction" or "retracement" as you could doing the Saudis and Russians a favor by actually being the ones to drive oil prices up for the entire world to pay for. Do the hedge fund managers with their algorithms even care?
  • John Brown on April 18 2018 said:
    You have to congratulate the Saudis & their determination to push oil prices up for their IPO. And the rest of the industry is eager to push prices up no matter how stupid medium & long term that is. The IMF doesn’t sees prices under $60 in 2019 but then they are bankers & economists who look at supply & demand & don’t take into account greed & corruption! The higher prices now the more supply from the USA & other countries & the bigger the window for renewables. So let Saudi Arabia/OPEC/Russia play their games & give us $100 oil. That will generate a massive incentive to increase supply. A gold rush outside of OPEC/Russia control. It will spur increased market share for renewables & it’s high enough to slow down economic growth Globally. The longer oil prices are over $60 & the higher they go the faster the days of OPEC/Russia being able to push prices up by idling supply will be over. What I want to know is who is stupid enough to buy The Saudi IPO at a premium because prices are $80 to $100 knowing that those prices are temporary & have set the stage for a massive price crash. The time for buying Aramco for top dollar is over. It has value since its cost of production is so low, but the long term price of oil is more like $25 $30 & lower than $85.
  • Mamdouh G Salameh on April 19 2018 said:
    And why not?

    A sound economic principle is to maximize the return on one’s assets to whatever level the global oil market can tolerate. With Saudi Arabia and other OPEC members sitting on more than 65% of global proven reserves, this principle should be their guiding strategy on oil prices.

    Saudi Arabia and the majority of OPEC members need an oil price higher than $100 to balance their budgets. To achieve this goal, they have to bolster the current positive fundamentals in the global oil market by extending the OPEC/non-OPEC production cut agreement well into the future. This could be in the form of a permanent mechanism flexible enough to react quickly to a tightening in the oil market or a build in crude oil and gasoline inventories.

    An aspiration to achieve $100 oil price has nothing to do with Saudi Aramco’s IPO. I am on record having been saying for the last five months that Saudi Arabia will eventually withdraw the IPO altogether since it no longer needs it financially. Moreover, its valuation of the IPO will not be accepted at face value by investors without independent auditing of its oil reserves. To this could be added the risk of US litigation. My own estimate of the IPO ranges from $35-$50 bn calculated on the basis of remaining Saudi proven reserves of around 58-93 bb and a price of $70/barrel giving a valuation of Saudi Aramco of $700 bn to around $under $1 trillion.

    The threat of rising US shale production has already been factored in by the global oil market as more of a hype than a reality. US oil output includes at least 2 million barrels a day (mbd) of liquid gases that can’t be classified an crude oil by exchanges around the world. There you have it.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Bill Simpson on April 19 2018 said:
    Keep it at $100 a barrel for over a year, and expect a recession in about 18 months.
    One reason for the global expansion has been the low oil price which gave people more disposable income to spend, increasing demand for everything. Jack up the price of gasoline, diesel, and propane, and aggregate demand will fall. Decreasing demand will reduce total employment.
    Due to the recent tax cuts, should a recession hit, the annual US budget deficit will top a trillion dollars.
  • Dan on April 19 2018 said:
    Oil $100 2019 !!!! I called $80, now don't doubt me and no, $100 won't cause a recession. It brings down deficit and people aren't spending on retail or expensive smartphones, it's travel after being locked up for 7-8 month winters with only 4 months til the next one.
  • Citizen Oil on April 20 2018 said:
    Oh boy, Mr. Trump is not happy about this manipulation . LOL. Although there is some truth to that, the shale guys may finally make a little bit of profit and return it to shareholders at these prices. OPEC is a whole different story . They are "profitable" at much lower prices but their social spending requires many to sell at $ 80+ . Hopefully this time they will fix their social spending issues and diversify their economy with any profits instead of buying gold plated Land Rovers and Cheetah's as pets.
  • CorvetteKid on April 23 2018 said:
    Umm....am I the only one who notices a slight problem here ?

    The Saudis are going to restrict their output....to drive up the price of oil....to help the valuation of a company....which sells oil from Saudi Arabia...and which is now going to see declining volumes to support said price increase ?

    Are the Saudis familiar with the concept of a circle ?
  • Tim Turley on April 23 2018 said:
    Until OPEC relaxes volume constraints, inventories will continue to decline. In the face of continued increase in world demand, there will be upward pricing pressure. Look for $80pb by end of 2018, and a price shock to $100pb by next year, caused by either a geopol event and/or short term outages.

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