A key driver in the pricing across all markets, not just the oil market, seems to be whether a promised meeting later this month in Moscow among the major oil producers to freeze current oil output will take place or not.
*** It is our understanding the Moscow meeting will indeed be confirmed by early next week. It will take place in Moscow as planned, and is most likely to begin on March 20 or soon after. The delay in confirming the meeting looks to be due primarily to the logistical details still being finalized — literally, where delegations will be staying and the final agenda of the main meeting and probable side meetings — and mostly by Moscow’s efforts to bring as many oil producing countries on board with the oil output freeze. ***
*** The freeze in output is an important step, but only the first towards the larger end goal, which is to bring the oil market into a new equilibrium with prices stabilizing above $40 but no higher than $60 by year-end. To do that will still require an eventual agreement between OPEC and non OPEC oil producing countries, led by Saudi Arabia and Russia, to trim output by at least one million barrels a day and ideally much more, in order to offset the expected rise in Iranian oil exports and a potential rebound in output by US shale producers. ***
An Iranian Exemption
As we reported previously (SGH 2/16/16, “Oil: Another Step Towards Output Deal”), Iran is not expected to participate in the freeze and is essentially being granted an exemption until new quotas are set by OPEC later this year. It is a crucial concession by the Saudis, albeit one set by the realities set in motion by the lifting of the international sanctions.
Saudi Arabia is in fact already well into its final preparations for the Moscow meeting to ensure its success. The higher oil prices on the back of the oil output freeze is already helping to ease the speculative pressure on the riyal and to boost the Saudi stock market, while oil revenues look set to come in higher than budgeted for the current fiscal year, reducing some of the pressure on spending cuts. These economic developments are something the Saudi leadership would be loathe to see reversed.
Indeed, the upturn in the economic outlook is also boosting the standing of Deputy Crown Prince Mohammed bin Salman as its chief architect. On that same note, the planning for an historic visit by King Salman bin Abdul Aziz to Moscow, for which the Deputy Crown Prince had laid the groundwork during his own trips to Moscow last year, are still in motion and a date may be confirmed by Riyadh in the coming weeks.
That the cease-fire in Syria is holding, along with new peace overtures in Yemen, as well as the success in oil output freeze lifting oil prices are all providing a firmer political foundations to the trip, which is ultimately aimed at a potential strategic shift in relations between Russia and Saudi Arabia.
Trust-building Steps Still Essential
Still critical in the wake of the Moscow freeze meeting will be the “trust-building” steps (SGH 1/29/16, “Saudi Arabia: Building Towards Firmer Oil Prices”) to lay the groundwork to an eventual shared and credible oil output cut.
The upcoming maintenance periods, particularly those in Russia and Saudi Arabia, will help to temporarily reduce crude oil supply, while the upcoming shift in the Saudi output to meet higher summer demand for electricity will also help bolster the momentum towards a higher oil price equilibrium.
Equally important, the new equilibrium price level going into the year-end is still premised as much on demand rising or at least not falling as much as it is in the supply of crude being trimmed down by the major oil producers. And that, of course, will depend on China and the US both steering clear of major downturns in growth and demand.
And, at least for now, the data from China confirms Beijing’s plans to step up the pace of imports of crude this year even as the economy is slowing in order to take advantage of low prices and even if some excess crude ends up in stockpiles (see SGH 1/19/16, “Oil: China to Lower Production, Raise Imports”).
An Impact on Monetary Policy
And one last note of worth, is how critical these developments in the oil price outlook are going to be to the major central banks.
While the prospects of an oil output freeze being sealed in Moscow later this month will not necessarily explicitly factor into the policy decisions tomorrow by the European Central Bank or the Federal Reserve and the Bank of Japan next week, the implications of higher or even stable sustained oil prices on the global inflation outlook and on big three currencies will almost certainly have a major influence on the policy path of all three of the central banks through this year.