Crude: Exit strategy

Well, if you thought that OPEC production cuts were difficult to put in place, it may be even harder to work out of them. The extremely successful OPEC cuts, along with their co-conspirator Russia, will at some point be scaled back but raising oil production may not be as easy as it seems.

According to reports by The Wall Street Journal, there is already a disagreement between Iran and Saudi Aria about the taget-price for oil.  The Journal reports that the “debate over prices reflects a shift in OPEC’s internal dynamics.” Previously, Iran had long advocated for higher prices, while Saudi Arabia had been a voice of restraint. The change partly reflects new dynamics in both countries’ politics and economics. No longer crippled by Western sanctions, Iran needs an oil price of only $57.20 a barrel to balance its national budget, according to the International Monetary Fund. Saudi Arabia needs about $70 a barrel to cover record national spending this year.

There will also be the issue as to how to raise production without upsetting the market; yet, based on demand trends in the global oil marketplace, that is not going to be a problem. In fact, as we predicted, it appears that the world is headed toward a structural shortage on oil in a few years as global oil discoveries plummet to the lowest in 40 some years--and big oil is still not investing enough to meet future oil demand needs.

Those concerns were raised last week by Saudi Aramco CEO Amin Nasser, who said that the  global oil and gas industry needs to invest more than $20 trillion over the next 25 years to meet expected growth in demand and compensate for the natural decline in developed fields, This is needed as the global oil industry has seen cuts of over 1 trillion dollars in traditional projects from 2014 to 2016. The over-reliance and trust in shale is going to be a problem as all the best spots have been drilled and lead to faster and faster decline rates. OPEC could agree in June to start easing crude oil output cuts in 2019, according to The Wall Street Journal.

Oil prices also shot back as the steel and aluminum tariffs won’t be as bad as feared. It is Trump diplomacy. In fact, Australia has now received an exemption, along with Canada and Mexico. That is causing the Aussie dollar to pop. A drop in U.S. rig counts also supported oil as drillers cut four oil rigs.  Surprisingly, natural gas rigs increased by seven. Oil may get some profit taking on reports of a slight Cushing, Okla., build of 293,000 barrels.

Oil prices are hanging in even as we are deep in refinery maintenance. AAA is warning about another spike in gasoline prices and are warning that it could be a tipping point for some consumers. Yet, with that blockbuster jobs number, most consumers will be better able to adjust to the higher price.

Of course, we were bullish on oil before bullish was the call. Now more folks are starting to get the fundamentals of this market. Years of underinvestment have been tightening our supply and low prices help create new sources of demand. Now with the Trump Tax cuts in place demand should surge.