To anyone who has said, thought or implied that OPEC is inconsequential to oil prices in this new era, think again.
OPEC is the reason oil prices surged late last year, and Saudi Arabia is the reason oil prices fell in the past few days.
In fact, Saudi Arabia is in the driver’s seat, at least for the foreseeable future, and the kingdom has more influence over the direction of prices than ever before.
Ultimately, the direction of oil prices hinges on the extension of the existing OPEC deal. Saudi Arabia, the biggest OPEC member, recently flexed its muscles both in Houston and then a few days later when an OPEC report showed how swiftly the country could ramp up production and flood the market if other members didn’t comply with the existing agreement. Saudi Arabia has done this before. OPEC plays hardball, and negotiations often have old-school tactics. But when everyone wants the same thing, deals get done.
Additionally, in this unique instance, Saudi Arabia has a vested interest in extending the OPEC deal that goes over and above the vested interest of other OPEC nations and other oil-producing countries, and that is the upcoming IPO of its oil assets. Saudi Arabia wants to have the largest IPO in history, and it can do that only if oil prices rise. Saudi Arabia will do everything in its power to influence oil prices, and that means flexing its muscles once in a while to get others to comply.
In the OPEC report issued Tuesday, we saw that other OPEC nations that have not already begun to cut production (according to quotas) began to do so, which is exactly what Saudi Arabia wanted.
Although Saudi Arabia clearly flexed its muscles, it also clearly got what it wanted, and everything is on track for an extension of the existing OPEC agreement.
The imbalance between supply and demand that has existed is also getting closer to equilibrium, and if the existing OPEC agreement is complied with, we will likely see balance between supply and demand before the existing OPEC agreement ends. But if the existing OPEC agreement is extended, deficits will exist and demand will exceed supply. That would be very bullish for oil prices.
A wild card exists: the taxation of imported oil.
When the March 8 EIA report was issued, it showed us that oil imports were significantly higher in the first part of the year than they were in 2016, by about 4.5 million barrels, which was about 10 million barrels higher than in 2015. The aggressive ramp-up in the import of oil is largely why stockpiles of oil in the United States are so high.
Some of this can actually be attributed to higher production levels by OPEC in the final month of last year, when it ramped up production before supply cuts kicked in. Imports from Saudi Arabia, for example, increased by 400,000 barrels, according to that report, but a change has happened.
The most recent report, issued on March 15, showed a significant decline in imports, and that decline is largely why stockpiles declined. Seasonally, this is a period in which stockpiles tend to increase, so seeing a drawdown during this time of year is unusual, but it also comes on the heels of unusual import activity, and import declines are largely why the stockpiles have fallen, so it’s understandable.
The wild card is that these imports may be subject to taxation under new policies yet to be disclosed by President Trump. He wants new jobs, he believes he could get them in the oil industry, but that is only true if prices increase. So ultimately he wants prices to increase at least modestly, and by taxing imports, prices will increase and new jobs will likely be created.
Although taxation is not something we can be sure of, we are relatively certain that Saudi Arabia’s vested interest will keep it on the side of supporting oil prices. We’ll ultimately see a deficit, and oil prices will be materially higher than they are today.
In short, Trump and Saudi Arabia are on the same page: Both want higher oil prices.