(This article was originally written on December 6th, 2019)
My call that “Brent crude oil prices will fly in December”, published last week (30 November 2019) in this media platform has been vindicated with a vengeance by a 7% spike in Brent crude as OPEC ministers convened in Vienna. I had thought a 400,000 barrel a day increase in the existing 1.2 MBD (million barrels per day) output cut would result. The news from Vienna is even better – 500,000 barrels a day with Baghdad, Moscow, Lagos and Algiers all agreed on the mission critical need for greater compliance and deeper cuts.
So OPEC/Russia will now cut 1.7 MBD of black gold at the precise moment that Arctic weather in North America has increased heating oil demand while distillate inventories are iffy. This means Prince Abdelaziz bin Salman of Saudi Arabia has achieved three national security objectives of the Saudi state since he became the kingdom’s Energy Minister in September.
One, he averted a global oil panic after the drone and missile attack on Aramco’s Abqaiq oil processing facility took out 5.7 MBD of Saudi production offline.
Two, he negotiated a complex synchronized output cut deal with Iraq, Nigeria and Russia with great diplomatic finesse.
Three, he managed to nudge the price of oil higher to $64 (Brent) in the first week of December, precisely as I had predicted last week. His performance in Vienna allowed the Saudi Aramco IPO to be priced at the top end of its range at a $1.7 trillion valuation in the world’s largest corporate flotation at $25.6 billion. Hopefully, my valued readers, friends and fellow investors implemented the strategies I had recommended in my column to make money if Brent really did “fly” in December.
The wet barrel market will now focus on a few strategic variables. Will the House of Saudi and the Kremlin be able to enforce the new 1.7 MBD output cut and extend the new pact beyond March 2020? Will the kingdom cut its output from 10.3 MBD to 10 MBD to kick start the new deal? Will spot tanker rates rise and Brent crude trade up to $68 – $70, the kingdom’s preferred price range? Only the Saudi prince and the Russian Tsar’s oil minister know since what happens in Vienna must stay in Vienna!
What happened when Prince Abdelaziz met his OPEC peers and Russian Oil Minister Alexander Novak at the Congress of Vienna? First, Saudi Arabia agreed to lead the current 1.7 MBD cut pact as the kingdom is OPEC’s swing producer. Second, the Saudis pressured Russia, Iraq and Nigeria to increase their compliance with the new pact. Iran’s oil exports have plummeted to a mere 250,000 barrels a day after Trump’s new “maximum pressure” sanctions and Libyan exports from the Ras Lanouf loading terminal on the Med are erratic due to militia conflicts. If the US dollar sags in 2020, as I expect, the macro stars are aligned to see Brent crude rise above $70. The index fund to own then is UCO – our champion this week.
Longer term, the auguries for the crude oil market are grim as US shale output is now 12.9 MBD. Yet Prince Abdelaziz cannot play risky games with the global oil market and abandon the role of swing producer, as Sheikh Yamani did in 1986, Hisham Nazer did in 1999 and Ali Al Naimi did in 2014.
This option is not on the agenda for multiple raison d’état – the relationship with Russia, Kuwait and UAE transcends mere oil issues. The kingdom has unveiled the most expansionary State Budget since the King Faisal/Khalid era in the mid/late 1970’s. The Saudi budget deficit is 6% of GDP at current brent levels and the budget break-even price is $85. Saudi GDP growth is 1% at current prices. Above all, 4.9 million Saudi citizens now own the Aramco IPO (on margin) and this existential fact alone precludes a senior son of King Salman from triggering a collapse in oil prices to $30, as Ali Al Naimi did in 2015.
I expect Prince Abdelaziz will agree to the Kremlin’s demand to exclude Russian condensates from its base cuts on Urals/West Siberian crude oil. This puts a disproportionate burden on the kingdom, UAE and Kuwait on deal compliance but the Kremlin plays hardball in black gold geopolitics, as it does in the game of nations. Iran? A wild card in OPEC now that Trump’s sanctions have choked oil exports and anti-regime protests have erupted across the Islamic Republic, a second Green Revolution.
My call? Brent moves to $68 – $70 by January. The Brent – West Texas spread widens. The oil futures markets go into backwardation. The Aramco IPO is a financial bonanza for millions of Saudi citizens and smart foreign investors who bought the kingdom’s New York ETF (symbol KSA), a tactical trade idea I recommended last week. Prince Abdelaziz becomes the most powerful Saudi oil minister since Ahmed Zaki Yamanhi become a media superstar after the October 1973 war in the Middle East.