Brent crude is trading ~USD71.41 per barrel, ~32.75% higher YTD, so it is only likely to be a matter of time before Donald Trump takes to twitter again to voice his displeasure that prices are too high. Tuesday’s API report showed a decline in US crude inventories for the prior week, when expectations had been for an increase, pointing to a further tightening in the market. Wednesday’s EIA data also showed crude inventories declining, the first decline in four weeks.
OPEC+’s agreed production cut of 1.2 million bpd from January this year to try and stabilise prices at a higher level, in conjunction with US sanctions on Venezuela and Iran, and Venezuela’s economic collapse, seems to have tightened up the supply side. Added to this, is the risk of disruption to Libyan production due to the outbreak of fighting.
Clearly, OPEC+’s review of the production cuts in June will be a key driver for the market and Russia’s view on oil prices is going to be an important factor in any OPEC+ decision. The current environment is positive for Russia with a budget break-even oil price well below current levels. Saudi Arabia seems to be comfortable with a level closer to USD80 per barrel likely reflecting a higher budget breakeven level in the USD80-85 range. Vladimir Putin’s comments at the Arctic Forum on 9th April were of interest although they effectively implied it was still too early for a decision: ‘This situation suits us as it is today, but we closely watch the market of course, together with our partners, primarily the major oil producers like Saudi Arabia and the Gulf states. We agreed that if cooperation is required, we will meet and discuss it in the second half of the year.’
The White House is due to review its waivers on sanctions on Iranian crude in May but the tighter market and OPEC+’s June production review needs to be considered. Equally, OPEC needs to be mindful of the threat of NOPEC (The No Oil Producing and Exporting Cartels Act), an antitrust piece of legislation, which having been approved by the House Judiciary Committee is due to be voted on by the full House. It remains doubtful that the Bill will be enacted into law, as it has failed on previous attempts, plus reports have pointed out that Saudi Arabia has some counter-leverage as they could consider transacting oil in currencies other than the US dollar.