According to the Global Times, in the middle of last week, the Ministry of Foreign Affairs of Saudi Arabia issued a statement confirming that the U.S. government had asked Saudi Arabia and other major oil-producing countries to postpone plans to significantly reduce crude oil production for one month starting in November this year.
The statement emphasized that Saudi Arabia does not accept “dictating” from the United States. On October 5, the “OPEC+” mechanism composed of members of the Organization of the Petroleum Exporting Countries (OPEC), including Saudi Arabia, and non-OPEC oil-producing countries such as Russia decided to significantly reduce production starting from November this year. Monthly production was cut by an average of 2 million barrels per day, causing dissatisfaction in the United States. The United States proposed the need to “reevaluate” its relationship with Saudi Arabia.
According to the Associated Press, the Saudi Ministry of Foreign Affairs issued a statement saying that the Saudi government “has stated during ongoing negotiations with the United States that all economic analyzes show that if the (U.S.) recommendation is followed, the OPEC+ (production reduction) decision will be postponed for one month. , will have a negative impact on the economy.”
The Associated Press interpreted that the Biden administration asked Saudi Arabia to postpone the reduction of crude oil production for one month in order to reduce the risk of soaring oil prices before the U.S. midterm elections in November and benefit the Democratic Party. The White House denied on the 13th that the US government’s request was related to the mid-term elections.
In this regard, CITIC Futures analyst Yang Jiaming said that the biggest negative for the oil market last week was the statement made by US National Security Council spokesman Kirby: Saudi Arabia coerced other OPEC countries to reduce production, and “more than one” OPEC member country disagreed with the production reduction led by Saudi Arabia. The United States will use future OPEC meetings to gauge Saudi Arabia’s stance on Russia’s extraordinary military operations. Kirby said that the United States can wait until the next OPEC meeting to see how things develop. Once Saudi Arabia’s production cuts are characterized as supporting Russia, the nature will be different.
“Ministerial meetings will be held every six months starting from the 5th of this month, which means that the United States will tolerate Saudi Arabia’s production cuts until March next year. The market will naturally price crude oil based on the fact that the United States will not take hostile actions against Saudi Arabia immediately.” Yang Jiaming further analyzed.
Fight back against OPEC+? There may not be much Biden can do
Faced with this resounding “slap” from Saudi Arabia, will the Biden administration take concrete actions to strongly counterattack OPEC+?
Some media commented that at least judging from the current situation, Biden has very few “trump cards” left.
Specifically, the only way for the United States to “reduce OPEC’s control over energy prices” is to increase domestic production, a move that has been rejected by Biden, who even promised to prevent the increase in domestic oil production.
The United States can only choose among the remaining measures, such as stopping providing arms support to Saudi Arabia, or using political means to put pressure on Saudi Arabia.
It is worth noting that the proposal to stop providing weapons to Saudi Arabia may be difficult to obtain the consent of all parties in the United States and cannot be truly implemented. And considering that Western countries are experiencing oil shortages, sanctions that may be “counterproductive” are not a wise decision.
Market participants: Crude oil will still face downward pressure
Last week, U.S. oil fell by 7.59% and Brent oil fell by more than 6.42%. After rising at least 15% in the previous week, the largest increase in seven months, it fell back. It stopped the two-week rising trend and fell for the tenth week in the last 15 weeks. .
Talking about the trend of international oil prices last week, Yang Jiaming told reporters that the U.S. inflation data in September exceeded expectations, causing the stock market, oil prices, gold prices, and Bitcoin to fall, and the ten bond yields to rise. However, U.S. stocks rebounded violently, and other assets followed. The market interpreted it as The S&P 500 index once gave up 50% of its post-epidemic gains, triggering procedural buying. A wave of inflows came in from put options bought to protect against such a plunge, prompting traders to buy stocks to keep the market neutral as profits were booked. Inflation has reached an inflection point but is still at a high level. Larger interest rate hikes are still needed to curb inflation. The demand for crude oil continues to be under pressure at the macro level.
In terms of fundamentals, according to Zheng Mengqi, an analyst at Hizheng Futures, on the supply side, it is difficult for U.S. production to expand significantly in the short term. OPEC has the say in global crude oil. As oil prices fall to around US$80/barrel, member states have reduced production to support the price of crude oil. willingness has been significantly enhanced. On December 5, a ban on Russian crude oil shipping took effect, and the implementation of a price ceiling may trigger Russia to take countermeasures. On the demand side, expectations of economic recession brought about by the Federal Reserve’s sharp interest rate hikes suppressed crude oil prices. In its latest monthly report, the IEA significantly lowered its global oil demand growth forecast for 2022 and 2023, mainly due to the surge in oil prices and the global economic recession caused by OPEC+ production cuts. In its latest monthly report, OPEC also lowered its oil demand outlook due to the economic slowdown. On the inventory side, U.S. commercial crude oil inventories increased significantly, while distillate inventories fell. On the macro level, U.S. CPI data in September exceeded expectations, and market expectations for an interest rate hike in December increased from 50 basis points to 75 basis points.
Looking forward to the market outlook, Yang Jiaming said that if the global economy weakens, production cuts will ultimately be detrimental to OPEC. This sentence implies that demand is the determinant of price, and supply will only affect short-term price fluctuations. In addition, OPEC officials did not tell the United States that they would not pay attention to Russia. Implementing an oil price cap was the reason they reached an agreement to cut production last week. OPEC is worried about the impact of low-priced Russian crude entering the market once the price cap is reached (although the current restrictions on Russia�It has not taken effect, it is just a change in logistics, and the impact on supply is limited. However, the current price includes the premium expected to ban Russian crude oil imports in December, and OPEC reduced production in response to this expectation). Hurricane Ian and OPEC+ production cuts have brought short-term support to oil prices. After the production cuts are expected to be implemented, the market may return to the path of recession expectations and suppress demand, and crude oil will still face downward pressure.
“On the whole, the positives are supported by OPEC+ production cuts, and the negatives are macro pressures, long and short intertwined, and wide oscillations. The market outlook needs to pay attention to the following risk points: the return of Iranian crude oil, the downward risk of oil prices caused by the continued release of SPR, and the escalation of geopolitical risks On the demand side, the Federal Reserve has aggressively raised interest rates, economic recession expectations are rising, the market has questioned the possibility of a soft landing, and crude oil demand is expected to weaken.” Zheng Mengqi said.