A year ago, Prince Abdulaziz bin Salman lamented that “psychological factors” and “extremely negative expectations” were hampering the oil market despite “very limited impact on global oil demand”. But this week, it was the Saudi oil minister who was trying to limit the market’s expectations for oil.
Asked why he again withheld his kingdom and 22 others in the OPEC+ from embarking on a meaningful production hike from April, Abdulaziz pointed to new Covid-19 restrictions in Italy’s Milan that invoked the pandemic nightmare from a year ago that wiped out a fifth of global oil consumption. While the world is bursting with optimism now about recovery in everything, the prince, specifically referring to oil demand, said: “I will believe it when I see it.”
It’s interesting, of course, how the virus has brought to kneel one of the most smug men in the oil industry. Not too long ago, the prince had dared oil bears, in Hollywoodian Dirty Harry-style, no less, to “Make my day”. He issued this warning in mid-September, only to swallow in silence a 15% price slide that came a month-and-a-half later (it would take Pfizer’s vaccine breakthrough in November to restore his wounded pride and set oil prices off on a path that was unmistakably higher).
What’s more interesting, and consequential, is that the market is again disbelieving Abdulaziz – although the disbelief is working in his favor this time. Minutes after the OPEC+ communique was out Thursday, oil prices jumped 5%. They barely dropped (okay, they did by 1%) at the close.
Notwithstanding crude’s latest rally, the Saudi oil minister’s hesitation in raising production is noteworthy. The global recovery in fuel demand has been tepid despite 10 months of OPEC+ cuts having drained much of the oil glut from a year ago and bringing inventories in the so-called OECD, or developed countries, to what the industry calls “normal” five-year levels.
Internal forecasts of OPEC – the 13 member Saudi-led Organization of the Petroleum Exporting Countries, minus its 10 allies steered by Russia that would make OPEC+ — is that the oil market can absorb an additional 1.4 million barrels per day.
Yet, Abdulaziz chose to err on the side of caution, dismissing his own advisers within OPEC who called for higher crude demand and rapid economic recovery from Covid-19 vaccinations. If we were to heed the minister’s warning to oil bears six months ago, we should also heed his innermost fears now about demand.
But hedge funds and other market speculators don’t like to hear advice that’s contrary to their positions. And so, the oil rally continues with the same alacrity we’ve seen since the end of October, adding 5% a week on the average in the past 18 weeks.
In my 25 years of observing the oil market – or for that matter, any market – I’ve come to realize one thing: speculators can never have enough of a good thing. Once they’re on a roll, they won’t stop, until they’ve destroyed either what they’re doing, themselves, or both.
The trouble is, oil, unlike any other asset, has great ramifications for the global economy, being the resource that literally powers and moves the world. There are serious consequences from crude prices being too high or low, and history is rife with periods of both.
The impact on oil from the 1973 Arab Embargo and the 1990 Iraq war is well documented. For modern-day context – and to include the emergence of fund managers in commodities – let’s look at the 2000 years.
We saw how $147 per barrel helped trigger the financial crisis. In later years, crude stubbornly at $100 a barrel and above helped create the shale revolution (some call it the monster) that took the market down to $25 by 2016. We also saw the insanity of minus 40 per barrel at the height of the Covid-19 and how that could never be sustained in a real world — case in point, the damage done to shale and U.S. oil production as a whole since.
Now, in just over four months, we’ve seen an 85% rally in an economy that’s barely out of the woods from the pandemic. At the rate we’re going, some Wall Street banks are whispering a return to three-digit pricing. Let’s stop pretending that there’s a limit to the greed of oil bulls – or for that matter, oil bears. The real problem, however, is pump prices of fuel.
At above $3 per gallon – which U.S. gasoline is inching toward – the American economy could be caught in a stagflation-like situation, where price pressures grow incredibly faster than the GDP and employment. High oil prices have done that before, and they can do that again.
Jobs are the first to go in a recession and usually the last to return in a recovery (the Obama years being proof). U.S. jobs growth for February came in way above expectations. Despite that, the unemployment rate barely changed, remaining at 6.2%.
President Joe Biden’s $1.9 trillion relief plan passed on Saturday could be an elixir for recovery. But even as that stimulus looked imminent earlier this week, the Federal Reserve said the country was unlikely to see maximum employment this year or anytime soon. This is why Abdulaziz is right in being concerned about oil demand.
But the Saudi oil minister also maintained some degree of his presumptuous self when he predicted this week that shale might never again be a problem for OPEC. “‘Drill, baby, drill’ is gone forever,” the prince told Bloomberg in an interview, referring to the phrase often used to describe the prolific activity in U.S. shale patches.
At a glance, he seems right. Shale production is down by a third from their 2020 record high and rigs actively drilling for oil have risen by less than 50 this year. Rigs are now at 310 versus the March 2020 high of 683. But rigs have also rebounded from an August low of 172. Abdulaziz is making a calculated bet that U.S. drillers will be keen to make a profit with fewer barrels and won’t flood the market like before.
As Bloomberg noted, the Saudis have often underestimated shale, which year after year has produced more than most expected. From a low point of less than 7 million barrels a day in 2007, total U.S. petroleum output more than doubled to a record of almost 18 million barrels a day by early 2020, forcing OPEC to cede market share.
Also, too much is being made out of Biden’s green energy agenda and the Armageddon it supposedly is for shale. True, the president froze the Keystone pipeline project on his first day in office (a decision I disagree with). Yet, he has not banned fracking altogether – contrary to the false claims of many (who love to keep that story up because it helps the narrative for higher oil prices).
What Biden has largely done is frozen new leases for drilling on public lands and offshore waters. According to federal data, only 5% of U.S. crude is produced from wells in these territories. Fracking on all private land, meanwhile, continues with no hindrance. To drill or not to drill comes down to economics more than politics. Crude at above $65 could do more for shale than the Saudi minister and oil bulls think.
On the precious metals side, gold is experiencing the reverse of oil’s fortunes. Gold futures posted a third straight weekly loss after falling to April lows. At around $1,700, the yellow metal is down 10% on the year and off 19% from the August record high of nearly $2,090.
Already on a slow-burn meltdown, gold got swept up again this week in an equity market rout despite its so-called standing as an inflation hedge. Biden’s Covid-19 relief bill, which should hand the U.S. a larger budget deficit and higher debt-to-GDP ratio – all things good for gold – got ignored as well. Gold’s tumble this week was driven by the same phenomenon of the past two weeks – surging bond yields and the dollar.
Yields and the greenback soared anew this week after Federal Reserve Chairman Jerome Powell said the central bank was unlikely to step up bond buying to tame fears of a sudden inflation spike from an U.S. economy increasingly becoming unshackled from the Covid-19.
While gold itself has been touted and used as a hedge against inflation for decades, that quality has been played down for months by markets. It remains to be seen if Biden’s stimulus bill will give it the lift it deserves in the coming week.
Oil Price & Market Roundup
New York-traded West Texas Intermediate, the benchmark for U.S. crude, did a final trade of $66.26 on Friday. It officially settled the session at $66.09, up $2.26, or 3.5%, on the day. For the week, WTI was up almost 7.5%. It also hit a 13-month high of $66.40.
London-traded Brent, the global benchmark for oil, did a final trade of $69.54 per barrel on Friday. It officially settled the session at $69.36, up $2.62, or 4% on the day. For the week, it was up almost 5% and also hit a 13-month high of $69.57.
New York-traded RBOB gasoline futures did a final trade of $2.075 per barrel on Friday. It earlier settled at $2.065 per gallon, finishing its first week above the $1-gallon territory since the $2.047 settlement for the week ended May 10, 2019. For the week, RBOB gasoline gained 10%, extending to nearly 47% its year-to-date rally.
Energy Calendar Ahead
Monday, March 8
Private Cushing stockpile estimates
Tuesday, March 9
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, March 10
Thursday, March 11
EIA weekly report on natural gas storage
Friday, March 12
Baker Hughes weekly survey on U.S. oil rigs
Gold Price & Market Roundup
Gold for April delivery on New York’s Comex did a final trade of $1,698 on Friday. It officially settled the session up $1.10, or less than 0.1%, at $1,701.80 an ounce. For the week though, it fell 1.5%, extending last week’s decline of 2.7% and the previous week’s drop of 2.5%. In Friday’s session, it fell to as low as $1,684.05 — the lowest price since April 2020 for a benchmark gold futures contract.
Spot gold, which reflects real-time trades in bullion, settled at $1,699.92, up $2.49, or 0.2%. For the week, it lost 1.9%, extending last week’s decline of 2.7% and the previous week’s drop of 2.3%. Hedge funds and other money managers sometimes rely more on the spot price than futures for determining direction in gold.