Matein Khalid
There is no economic reason why OPEC+ chose to add barrels to the global oil market at a time when bearish psychology and positioning dominates trading as attested by the plunge in speculative long positions in both the West Texas Intermediate and Brent IPE futures contracts. The only explanation is that both Saudi Arabia and Russia faced political pressure from a Trump White House that wants lower gasoline prices on the eve of the Ukraine peace summit in Riyadh, whose endgame can be an end to sanctions on the Kremlin and price caps on Ural Light oil exports.
Brent crude has fallen from $82 to $69 now as hedge funds and oil traders have accumulated bearish bets at the fastest pace in 3-years. OPEC+’s capitulation proves that Saudi Arabia is now willing to end its defense of the $70-$5 preferred trading range amid open violations of the quotas by Kazakhstan, Iran, Iraq, Algeria and even some Gulf exporters. This could mean a price war and an oil price crash, as the world witnessed in 2014-15/2019-20 since Riyadh/Moscow will now be selling oil at a time when OPEC’s spare capacity is at least 7-MBD, output from Canada, Gulf of Mexico, offshore Brazil/West Africa and Guyana is set to rise by almost 1.5-MBD.
Geopolitical risk in black gold will recede since President Putin has publicly agreed to discuss a truce in the Ukraine war for the first time since February 2022, a seminal event in international politics. China has ordered refiners to reduce their outputs of gasoline and diesel, yet another bearish datapoint in world’s biggest crude oil and petroleum products importer.
The Atlanta Fed’s -2.8% GDP Now estimate, the impact of Trump’s tariff threats on world trade, the $1.3 trillion stock market meltdown and cyclical growth decline in India as well as clear evidence of deflation in the Chinese economy means that Brent will breakdown from its $70-$82 trading range. Citigroup has a price target of $60 and JP Morgan has a post-Russia sanction price of $50 a barrel.
The collapse of the Murban/Dubai premium and China’s 5% fall in imports shows that heavy-sour Gulf oil exports to Asia are also selling at lower prices. Maximum pressure on Iran, SPR replenishment and US pressure on Chevron to quit operating in Venezuela are all bullish data points but have been ignored in the oil market as the dominant themes are hedge funds/oil traders selling the prospect of post-sanction Russian oil exports surge and the sword of Damocles that strangles world trade and industrial production.
Recession risk in the US, the world’s largest oil and gas producer/consumer is rising alarmingly. An oil glut, an OPEC+ oil price war and a fall in economic growth due to Trump’s tariffs have converged to make the bull case for oil as deceptive as a desert mirage.
The Euro and cable’s surge on Planet Forex continues even though the ECB cut its deposit rate by 25 basis points. A revolutionary shift in the global economic balance of power has occurred in Germany and an almost $1 trillion rise in defense/infrastructure spending changes the outlook for equities and Bunds in the EU’s economic colossus, one-third of its GDP. Ignore German equities at your own peril!
Also published on Medium.
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