Oil patch iinsider: Sheppard offers hope for OPEC oil price bailout later this year

Kay Cashman

Petroleum News

In a recent Markets Insights piece in the Financial Times, the publication’s energy editor David Sheppard offered hope for an OPEC bailout due to Saudi Arabia’s urgent need for higher oil prices.

Following is an abbreviated look at that article. To read the entire piece go to https://www.ft.com/

Reminding readers that Saudi Arabia’s energy minister, Khalid al-Falih, the OPEC kingpin, has “long vowed to do ‘whatever it takes’ to uphold oil prices,” Sheppard predicted the minister will try to convince OPEC members and their allies to make deeper cuts when they meet in December.

Saudi Arabia, he said, has already “sharply reduced production in the past seven months, dragging along non-member Russia and OPEC allies such as the United Arab Emirates in restricting output. …”

Admitting the strategy has “not really worked,” with oil prices recently dipping below $60, Sheppard said the main reason for oil’s latest nosedive is the U.S.-China trade war and related economic fears of a coming surplus, as well as the continued increase of U.S. shale oil.

The “obvious conclusion,” Sheppard wrote, per Bernstein analysts, is that OPEC has to remove another 1 million barrels of oil from the market if it is to have “any chance” of supporting a price floor of $60 a barrel.

“Given OPEC’s policy of supply side price management it would seem probable they will take further action,” Bernstein analysts were quoted as saying.

Sheppard pointed out that other analysts disagree, noting the “micro” factors for oil are supportive of a higher price, such as “slowly tightening inventories and early indications that the US shale juggernaut might finally be slowing, if not reversing.”

These analysts contend that “macro” factors such as fear of a recession and the weakening of China’s currency are what recently negatively impacted the price of oil. If economic growth turns out to be brighter, they say, oil prices will rally.

“These are all sound reasons,” Sheppard said, but “when it comes to Saudi Arabia’s next decision, there are good reasons to believe Bernstein is right. Saudi Arabia knows it needs to do more than just manage inventory levels when deciding whether to make deeper cuts,” reminding readers U.S. President Donald Trump’s focus “is shifting towards his 2020 re-election campaign. Given that low gasoline prices are one of Mr. Trump’s big pitches to voters,” Saudi Arabia knows “the window for aggressive action in the oil market is narrowing if it wants to escape his wrath.”

Meanwhile, Sheppard said, the long-term outlook for oil is not in Saudi Arabia’s favor, referring to forecasts from the International Energy Agency that the oil market will face another surplus in 2020.

If Saudi Arabia wants to keep a $60 a barrel oil price floor, “it needs to start planning now,” he said. Making “small tweaks at the margin of supply would be risky, given the political difficulty of coming back for a bigger cut next year as America gears up for elections.”

It’s better to reduce production too much this year, Sheppard said. “and then loosen the taps if necessary, rather than trying to scramble” to organize a deep cut during the presidential election - especially since Saudi Arabia is “heavily invested” in Trump winning.

Cutting production more deeply in 2019 “would also allow OPEC to get ahead of any further slowdown in oil demand, with the US and China appearing to bed down for a long struggle over trade.”

Another factor for Saudi Arabia is the “reinvigoration of its long-delayed plans to list a portion of state oil giant Saudi Aramco.” It continues to publicly say that an initial offering will occur within the next two years.

“Investment bankers are flocking back to Riyadh with dollar signs in their eyes,” Sheppard said, but if Saudi Aramco is to “get anywhere close to the $2tn valuation placed on the company by the kingdom’s powerful crown prince … an oil price north of $60 a barrel is a must.”

- compiled by Kay Cashman