Brent crude has fallen to $78 in Asia while WTI is $74 even though the Israel/Hamas war has resumed in Gaza. The bear market in oil has seen 6-weeks of relentless selling in the futures markets and even the latest OPEC+ ministerial meeting failed to convince traders that an additional 900,000 barrel of promised output cuts will offset the tsunami of supply and weak diesel, gasoline and distillate demand.
The internal fissures in OPEC+ symbolized by Angola’s open threat to ignore its quotas and keep pumping above the limit negotiated by the Saudi Energy Minister in June and the influx of American cargoes in Europe have only added to the bearish sentiments and short macro hedge fund positioning in the oil markets, as attested by the pressure on time spreads that demonstrate a supply glut in the global wet barrel market. Brent could not even hold the psychological support level of $80 even though the yield on the 2-year US Treasury note has fallen to 4.6% as Wall Street bond traders price-in Fed rate cuts in 2024. A lower dollar and winter in the Northern Hemisphere, let alone the fractured geopolitics of the Middle East have had no real impact to arrest the bearish momentum in both Brent/WTI. Even the news that Houthi rebels in Yemen targeted Israeli shipping in the Red Sea had no impact on the oil bears.
With US oil output now at an epic high of 13.25 MBD, it is obvious that OPEC+ has lost its dominance of the global oil market, even though Saudi Arabian output has fallen to 9 MBD, more than 3 MBD below its spare capacity limit after multiple unilateral output cuts. The IMF estimates that Saudi Arabia’s budget breakeven price of oil is $85 a barrel and it is only a matter of time before fiscal realities and the need to finance a trillion dollar pipeline of mega projects could force Saudi Arabia to abandon its policy of acting as the central bank of black gold, OPEC+’s de facto swing producer while Angola, Nigeria, Libya, Iraq, Iran, Kazakhstan, Russia openly pump above OPEC+ limits. This raises the risk of a price war akin to what we witnessed in 2014-2015 and 2019-2020, whose endgame is invariably an oil price crash, especially when demand in China and Europe plunges in unison.
It does not make strategic sense for Saudi Arabia to initiate a price war to discipline OPEC+ quota violators since the real problem is the spike in non-OPEC supply that is hitting the market this winter, led by the surge in US shale oil and gas production and 3.2 MBD in Iran oil output, mainly exported to China at cut rate prices without any response from the Biden White House.
In essence, the voluntary 1 MBD Saudi output cut in June was negated by the surge in Iranian crude of at least 700,000 barrels a day. The strategic logic of Von Neumann’s Game Theory suggests that Saudi Arabia will abandon its restraint and raise Aramco output by 2.5 MBD. When crude oil was 90, I was bearish for a $60 target if Riyadh goes for its nuclear option, all bets are off. Ursa Maxima!
Also published on Medium.
