The Trump administration made some promises to the Saudi government supposedly under the table and then turned around and did just the opposite of what was promised. Now the American people will feel the backlash from the Saudi’s with higher oil prices.
In an article we wrote on Nov. 16 titled “Saudis Got ‘Trumped’ – Watch What Happens Next,” we wrote that in exchange for renewed sanctions on Iran, Saudi promised under the table with President Trump to keep the oil market well supplied. This meant that the Saudis would export extra crude into the US market to keep US inventories bloated. What followed was that the Saudis were fooled as the Trump administration issued waivers to 8 countries granting the ability to keep importing Iranian crude. Feeling back stabbed, the Saudis swiftly changed its oil policy.
This time around, there are rumors again that the Trump administration will not extend the waivers, but the Saudis won’t be fooled again. Khalid Al-Falih, Saudi’s Energy Minister, said this week that Saudi’s oil production will drop to ~9.8 mb/d in March and exports will drop to ~6.9 mb/d. This would be a 1.4 mb/d drop since November. This decrease, we estimate, would bring OPEC’s crude exports to the lowest level since 2014.
Saudi’s oil policy is also becoming very evident via the chart above. You can see that US crude imports from Saudi peaked the week of the midterm elections. They have trended lower ever since. Now keep in mind that last week’s EIA oil storage report encompassed fog disruptions in PADD 3, so the ~6.2 mb/d crude import will likely rebound. But the trend is still obvious, and Saudi will likely ship even fewer barrels to the US.
Source: Kpler, HFI Research (Note: February is our estimate.)
We expect February exports to be even lower as Saudi has only exported 1 VLCC to the US for the first 14 days of February. DHT Lion is expected to arrive in PADD 5 on March 23.
What’s increasingly clear to us is that Saudi’s oil policy is becoming independent of other political motives. The domestic pressure arising from the need for higher oil prices will ‘trump’ all other factors. We believe that given the combination of lower shale growth in Q1 2019 and increasing heavy sour crude shortage by the second half of 2019, Saudi will get the average oil price they need in 2019. We estimate their breakeven to be the low $70s to mid-$70s assuming ~7.2 mb/d of exports for 2019.
What will also be interesting to watch going forward is that Saudi has just changed the tax on expat, which was the primary cause for lower domestic power burn demand last year. If Saudi’s power burn demand rebounds into the summer of 2019, that would also imply less crude export volumes, which would again, be another tailwind.
It’s clear to us that the forces that will drive the oil market rebalancing this year will still be in Saudi’s hand, but with increasing geopolitical pressure, the desire to control balances may turn into a curse/shortage by 2020. Non-OPEC ex-US supplies will continue to decline with Brazil leading the pack by disappointing the ~300k b/d of production growth the consensus is expecting, while declines of ~20k to 50k b/d throughout the world starts to eat into balances.
Our global supply and demand model suggests a deficit of ~1 mb/d in the 2nd half of 2019, but some of this deficit will likely be offset by increasing production from Saudi/Russia.
Overall, the outlook for oil is very bullish this year despite the negative sentiment in the market. We are forecasting Brent to average $75 to $78 this year.
In the coming month, we will be starting an oil trading portfolio. We have built a framework for understanding near-term trends in oil prices and look forward to initiating this new oil trading portfolio to dampen the volatility of owning energy stocks for the long term. For readers interested in the methodology or how we are thinking about this framework, we published a piece over the weekend describing it to our subscribers. We are also offering a 2-week free trial, so you can sign up here and see for yourself. We hope to see you join the HFI Research community.