© Reuters
By Barani Krishnan
Investing.com – A year ago, Prince Abdulaziz bin Salman lamented that “psychological factors” and “extremely negative expectations” were hurting the oil market, despite “the very limited impact on global oil demand”. But this week, it was the Saudi oil minister who was trying to limit market expectations for oil.
Asked why he again prevented his kingdom and 22 others from OPEC from embarking on a significant increase in production in April, Abdulaziz pointed to the new Covid-19 restrictions in Milan Italy that invoked a year ago’s pandemic nightmare that destroyed one fifth of oil consumption production. While the world is bursting with optimism now with the recovery of everything, the prince, referring specifically to the demand for oil, said: “I will believe it when I see it”.
It is interesting, of course, how the virus brought one of the most presumptuous men in the oil industry to his knees. Not long ago, the prince dared oil bears, in the Hollywood style Dirty Harry, no less, to “make my day”. He issued this warning in mid-September, just to silently swallow the 15% drop in prices that occurred a month and a half later (Pfizer’s vaccine discovery in November would be needed to restore his injured pride and soar oil prices) a path that was unmistakably higher).
What is more interesting, and consequent, is that the market is again disbelieving Abdulaziz – although disbelief is working in his favor this time. Minutes after the OPEC + statement came out on Thursday, oil prices rose by 5%. They barely fell (ok, they fell by 1%) at closing.
Despite the latest oil spike, the Saudi oil minister’s hesitation to increase production is noteworthy. The global recovery in fuel demand has been lukewarm, despite 10 months of OPEC + cuts having drained much of the excess oil from a year ago and bringing stocks in the so-called OECD, or developed countries, to what the industry calls five “normal” year levels.
The internal forecasts of OPEC – the 13 members of the Organization of Petroleum Exporting Countries led by the Saudis, minus its 10 Russian-led allies who would make the expanded OPEC + group – is that the oil market can absorb 1.4 million barrels additional per day.
Even so, Abdulaziz chose to err on the side of caution, dismissing his own advisers within OPEC, who called for greater demand for crude oil and quick economic recovery with Covid-19 vaccines. If we were to listen to the minister’s warning to oil bears six months ago, we should also pay attention to his most intimate fears about demand now.
But hedge funds and other market speculators do not like to hear advice against their positions. And so, the rise in oil continues with the same liveliness that we have seen since the end of October, adding 5% per week on average for the past 18 weeks.
In my 25 years of observing the oil market – or, in this case, any market – I realized one thing: speculators never tire of a good thing. Once they are on a roll, they will not stop, until they have destroyed what they are doing, themselves or both.
The problem is that oil, unlike any other asset, has major ramifications for the global economy, being the resource that literally feeds and moves the world. There are serious consequences to whether oil prices are too high or too low, and history is full of periods for both.
The oil impact of the 1973 Arab embargo and the 1990 Iraq war is well documented. For the modern context – and to include the rise of commodity fund managers – let’s look at the 2,000 years.
We saw how $ 147 a barrel helped trigger the financial crisis. In later years, oil stubbornly at $ 100 a barrel and above helped to create the shale revolution (some call it a monster) that brought the market to $ 25 in 2016. We also saw the insanity of minus 40 per barrel at its peak from Covid -19 and how it could never be sustained in a real world – case in point, the damage done to shale and US oil production as a whole since then.
Now, in just over four months, we have seen an 85% recovery in an economy that has barely emerged from the pandemic. At the pace we are going, some Wall Street banks are whispering a return to triple-digit prices. Let’s stop pretending that there is a limit to the greed of oil bulls – or, by the way, oil bears. The real problem, however, is the fuel prices at the pump.
Above $ 3 per gallon – that US gasoline is advancing slowly – the US economy can be caught in a stagflation situation, where price pressures are growing incredibly faster than GDP and employment. High oil prices can do that.
Jobs are the first to enter a recession and generally the last to return in a recovery (Obama’s years are the proof). came well above expectations. Despite this, the unemployment rate has hardly changed, remaining at 6.2%.
President Joe Biden’s $ 1.9 trillion aid plan approved on Saturday could be an elixir for recovery. But even with the stimulus looking imminent earlier this week, the Federal Reserve said the country is unlikely to see as many jobs this year or soon. That is why Abdulaziz is right to be concerned about oil demand.
But the Saudi oil minister also maintained a degree of his presumption when he predicted this week that shale may never again be a problem for OPEC. “‘Drill, baby, drill’ is gone forever,” the prince told Bloomberg in an interview, referring to the phrase often used to describe the prolific activity in shale patches in the United States.
At first glance, it looks right. Shale production dropped by a third from the 2020 record and active oil drilling increased by less than 50 this year. The platforms are now at 310 against the March 683 high of 2020. But the platforms have also recovered from an August 172 low. Abdulaziz is making a calculated bet that U.S. drills will be eager to profit from fewer barrels. and will not flood the market as before.
As Bloomberg noted, Saudis often underestimated shale, which year after year produced more than most expected. From a low of less than 7 million barrels per day in 2007, total U.S. oil production more than doubled to a record high of almost 18 million barrels per day in early 2020, forcing OPEC to cede share of Marketplace.
In addition, much is being done with Biden’s green energy agenda and Armageddon, allegedly for shale. It is true that the president froze the Keystone pipeline project on his first day in office (a decision I disagree with). However, he did not completely ban hydraulic fracturing – contrary to the false claims of many (who love to keep this story because it helps to narrate the rise in oil prices).
What Biden did in large part was to freeze new leases to drill on public land and offshore waters. According to federal data, only 5% of U.S. oil is produced in wells in those territories. Fracking in all private lands, however, remains unimpeded. Drilling or not drilling comes down to pure economics, in fact. So crude oil above $ 65 could do more for shale than the Saudi minister and oil advocates think.
On the precious metals side, gold is experiencing the downside of oil. Gold futures posted a third consecutive weekly loss after falling to April lows. For about $ 1,700, yellow metal fell 10% in the year and 19% compared to the August record of almost $ 2,090.
Already in a slow meltdown, gold was swept up again this week in a stock market crash, despite its so-called protective position against inflation. The imminent Senate approval expected for President Joe Biden’s $ 1.9 trillion Covid-19 relief bill, which was supposed to deliver the United States a bigger budget deficit and a bigger debt to GDP – all good for the gold – was also ignored. The fall in gold this week was driven by the same phenomenon as in the past two weeks – the rise in bond yields and the dollar.
Yields and the dollar soared again this week after Federal Reserve Chairman Jerome Powell said the central bank is unlikely to increase bond purchases to tame fears of a sudden rise in inflation in an increasingly free US economy. of Covid-19.
Although gold itself has been touted and used as a hedge against inflation for decades, this quality has been minimized for months by the markets. It remains to be seen whether Biden’s stimulus project will give it the boost it deserves next week.
Oil prices and market summary
The New York market, the benchmark for US oil, made a final trade of $ 66.26 on Friday. He officially ended the session at $ 66.09, an increase of $ 2.26, or 3.5%, on the day. In the week, WTI rose almost 7.5%. It also hit a 13-month high of $ 66.40.
The London market, a global benchmark for oil, had a final trade of $ 69.54 a barrel on Friday. He officially closed the session at $ 69.36, up $ 2.62 or 4% on the day. For the week, it rose almost 5% and also hit its 13-month high of $ 69.57.
The New York market made a final trade of $ 2,075 per barrel on Friday. It previously stood at $ 2,065 per gallon, ending its first week above the $ 1 gallon territory since the $ 2,047 deal for the week ending May 10, 2019. For the week, RBOB gasoline gained 10%, extending to almost 47% in the previous year – date rally.
Energy calendar ahead
Monday, March 8
Cushing’s private stock estimates
Tuesday, March 9
weekly report on oil stocks.
Wednesday, March 10
Weekly EIA report on
Weekly EIA report on
Weekly EIA report on
Thursday, March 11
Weekly EIA report on {{ecl-386 || natural gas storage}
Friday, March 12
Baker Hughes weekly survey on
Gold price and market summary
at New York’s Comex, it made a final trade of $ 1,698 on Friday. He officially ended the session at $ 1.10, or less than 0.1%, at $ 1,701.80 an ounce. For the week, however, it fell 1.5%, extending the drop of last week by 2.7% and the fall of the previous week by 2.5%. In Friday’s session, it dropped to $ 1,684.05 – the lowest price since April 2020 for a benchmark gold futures contract.
, which reflects real-time trading in gold, closed at $ 1,699.92, an increase of $ 2.49, or 0.2%. In the week, it lost 1.9%, extending the fall of the previous week by 2.7% and the fall of the previous week by 2.3%. Hedge funds and other money managers sometimes rely more on the spot price than on the futures to determine the direction of gold.
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.