All things considered, it was surprising to many that crude oil prices didn’t spike even higher after Saudi Energy Minister Khaled al-Falih, in response to the Trump Administration’s announced “zero” waivers extensions after May 2 to its unilaterally imposed economic sanctions against Iran, confirmed the Kingdom would not be ramping up its crude output until it assesses the “market balance” in the coming weeks.
But perhaps not.
*** Riyadh is indeed adopting a lagged oil policy posture, but we understand Saudi oil officials view Brent crude at $80 a barrel to be an upper threshold to a $70 to $80 a barrel target range it has sought since last year. A rise in crude prices towards that level would trigger verbal intervention, followed by an actual increase in supply if the increases were looking sustained. ***
*** Notwithstanding renewed demands by President Trump for OPEC to “bring oil prices down,” it won’t in fact take much of an upward momentum in crude prices from here to trigger a more muscular Saudi response to dampen upward price pressures, in particular, with an eye to blunt higher US gasoline prices. ***
A few points for context to the Saudi oil policy stance:
** Saudi Arabia has the capacity to fairly quickly ramp up its exports to meet any supply shortfall as promised to the Trump Administration. Output was brought down to around 9.8 million bpd, with exports just under 7 million bpd, from the just over 11.1 million bpd peak last November. Riyadh will already be increasing output by at least 300,000 bpd or more to meet its own summer surge in domestic demand, and it will still have around 500,000 bpd of crude export capacity if needed and still be within its December OPEC+ output quota target of 10.3 million bpd.
** Saudi officials in any case generally believe the demands for a shortfall offset by the Kingdom will be fairly limited to perhaps a few hundred thousand barrels at most, and they do not believe Iranian exports will in fact fall to zero in the coming months.
** On that front, we understand Chinese officials expressed strong objections to US officials over the threat to end the current Iranian waiver, seeing it as a thinly disguised attempt to gain leverage as its trade negotiations with the Trump Administration enter a final, critical stage. We understand the State Department has wiggle room to grant limited waiver extensions before the May 2 deadline, and our sense is that China will indeed see a waiver on its imports from Iran.
** Chinese crude imports from Iran averaged around 600,000 barrels a day in recent years, but are estimated to have fallen to less than half that at present. No matter what the US does in terms of Iran policy, China will continue to import Iranian crude oil, Chinese officials vow. That said, it will not be increasing its totals, at least not until the trade talks are completed.
** Iranian total oil exports averaged some 1.978 million bpd to 2 million bpd for most of 2018 before plunging down to around a low of 1 million bpd to no more than 1.4 million bpd after the imposition of the new US sanctions. Iranian officials are braced for crude exports to plunge even further to perhaps to perhaps to a new low around 400-500,000 per day, according to internal Iranian estimates.
** The Trump Administration vowed “zero” waivers — officially referred to as “significant reduction exceptions, or SREs — for any country importing Iranian crude or condensates after the current handful of waivers expires on May 2.
** Of the eight countries, China, India, Turkey, South Korea, Japan, Greece, Taiwan, and Italy that were granted waivers last year, Japan, South Korea, Italy, Greece, and Taiwan have all already dropped their Iranian oil imports to near zero due to the shipping and insurance risks.
** In addition to China, India seems likely to also see a limited extension of its waiver to 170,000 to 270,000 bpd of crude imports from Iran. India, in part, is reaching out to Iran to counter overtures between Pakistan and China. Turkey has already voiced its objection to the non-renewal of waivers and in most probability will continue to import around 70,000 to 90,000 bpd from Iran.
** With Iranian crude exports already having plunged, Saudi officials stress they need to assess the global oil market’s true supply and demand balance before responding to new declines in Iranian crude exports. For one, they remain cautious on the demand outlook while there are still concerns over the pace of global growth.
** And of course, their reluctance to rush into higher output is driven by the lesson learned from last year, when the Kingdom preemptively pushed its output higher to 11.1 million under pressure from the Trump Administration, only to see the White House renege at the last minute to extend the various waivers to seven countries for fear of driving gasoline prices too high in front of the US November 2018 midterm elections.
** Another unspoken reason for the Saudi caution this time round is balancing their commitments to the Trump White House with their concern to keep output decisions within the OPEC+ Vienna framework, on two fronts:
** First, Riyadh will be loathe to unilaterally increase output before a key meeting of the Joint Ministerial Monitoring Committee on May 19, whose recommendations will be setting the agenda for the June 25/26 OPEC+ meeting on whether to extend or adjust the current agreement since January to trim 1.2 million bpd in output that has been instrumental in driving prices up this year.
** In addition, and perhaps more critically, we understand Saudi and Russian energy officials are engaged in intense negotiations to deepen their strategic energy alliance to include firm commitments of Saudi investments in the Russian energy sector, and even a new Saudi-Russian centered OPEC+ structure. We understand these negotiations have also entered a critical stage and will continue through May with a decision by early June.
** Interestingly, the US announcement the Kingdom and the UAE would offset any Iranian supply shortfall did not include Kuwait, which also has considerable spare capacity. But in the wake of the Qatar crisis, Kuwait has been steadily moving closer to Iran, and in an case, much of its spare capacity is tied up in the dispute with the Kingdom over the Neutral Zone, which represents some 500,000 barrels of joint spare capacity if needed.