We think the market has overlooked the potential (we think likelihood) for Saudi Arabia to increase oil exports in June, not waiting until after the June 30, 2019 term of the OPEC+ agreement. The market impression (including our impression) from the last week’s Saudi Energy Minister Al Falih and Russia President Putin comments was that there weren’t going to be any oil export increases at least thru the June 30, 2019 term. Al Falih has not changed Saudi’s commitment to the OPEC+ agreement, in fact, he stressed that commitment this week. However, in a lengthy interview with RIA/Sputnik (Russia) news, we believe Al Falih laid out the road map to the math for increased Saudi oil exports in June. He clearly messaged that meeting customer demand was the priority, and that, if required, Saudi could increase exports while keeping its commitment to the Saudi voluntary limit and to keeping the overall OPEC+ commitment volumes. This morning, the reports that major Asian customers are asking Saudi for more oil than already planned and for these oil shipments in June provide the door opening for Saudi to increase oil exports in June and not wait until July. We won’t be surprised to see Saudi Arabia increase oil production by 400,000 b/d or more in June to meet this extra customer demand for June deliveries. We suspect Saudi will get some criticism as Trump takes credit for making this happen. Trump did make it happen as these wouldn’t be needed if Trump hadn’t decided to clamp down more on Iran waivers. But the bottom line is that moving into the peak demand period for oil, the market needs more oil if more Iran oil is taken off the market.
The headlines on Tues were that Saudi’s Al Falih may have signaled a potential OPEC+ extension to end 2019. On Tues morning, Saudi Arabia energy minister Al Falih gave an exclusive interview with RIA/Sputnik (Russia news [LINK] and the headlines and stories were all on the potential extension of the OPEC+ deal until the end of 2019. The headlines that everyone saw was from news services picking up the Bloomberg and Reuters reporting of the interview, as opposed to looking at the full transcript in the detailed RIA/Sputnik interview. Bloomberg and Reuters had similar reporting. The Bloomberg terminal story was titled “OPEC+ Deal Extension Is Possible to End-2019, Al-Falih Tells RIA” and Reuters story was titled “Saudi’s Falih will stick to global oil deal, pact could be extended: RIA” [LINK]. Reuters wrote ““We will look at (global oil) inventories – are they higher or lower than the normal level and we will adjust the production level accordingly. Based on what I see now … I am eager to say there will be some kind of agreement,” Falih RIA. “It may remain the same, or could change up or down, I don’t know.” We agreed with the Reuters and Bloomberg takeaway that an OPEC+ extension was possible or even likely, albeit likely at lower levels.
But there was a bigger story in the detailed RIA/Sputnik interview transcript– Al Falih laid out the roadmap for a potential increase in Saudi oil exports in June, not July. Prior to Tues, the market impression (including our impression) from the Saudi Arabia and Russia messaging was that there would be no changes during the term of the OPEC+ cuts ie. thru June 30. We read the source RIA/Sputnik interview and believe Al Falih’s key potential (we say likely) oil action was missed. Al Falih stressed that his first commitment was to meet customer demands including those who are substituting Iranian barrels with Saudi barrels. That priority to Saudi’s actions is very clear. Its why we looked closely at what he was saying about increases and why, early Tues morning, we tweeted [LINK] “Did Saudi open door to higher oil exports in June? Will stay “clearly” within OPEC+ deal, not exceed “our” voluntary limit & “not exceed overall production limit”. But well below in May and “see what June requires” to meet “our” customer demands”. Al Falih seemed to clearly point to the potential (we say likelihood) for Saudi Arabia to increase oil exports in June, not July as previously signaled. He notes Saudi will stay within the OPEC+ deal and they are committed to the overall production limit, but then he reminds they are “significantly below” the limit until the end of May and “we will see what June requires”. This is to meet customer demand including those who are substituting Iranian barrels for Saudi barrels. Al Falih said to RIA/Sputnik “We have issued a statement after the American statement was issued regarding sanctions. We have made it clear about two things. First of all, we will meet the demands of our customers including those customers who are substituting Iranian barrels for Saudi barrels. I’m reiterating our commitment to meet all those demands. But we will do it while also staying clearly within the OPEC Plus agreement. We don’t need to exceed our voluntary limit of the OPEC Plus agreement to meet this. As you know until the end of May we will be significantly below that limit because our production is well under 10 million barrels a day and exports under 7 (million) until the end of May. So we will see what June requires but we think it will in any way exceed the overall production limit that we have committed too. We are quite comfortable that we can meet our commitments to both our customers as well to fellow producers. At the same time, we’re quite comfortable that our markets are well supplied today; that there are healthy inventories and the markets are not right to be concerned”.
The limit to how much of an increase will be to stay onside Saudi’s voluntary commitment level and OPEC’s overall commitment level. After first highlighting his priority to meet customer demands, the Al Falih statement also included two key limiting factors for any potential increase in Saudi oil production. First, he says “We don’t need to exceed our voluntary limit of the OPEC Plus agreement to meet this” ie. Saudi Arabia will not exceed their individual quota cut. Second, he is also committed to not “exceed the overall production limit” ie. whatever Saudi Arabia does within its voluntary limit won’t put the group offside their overall production limit. The data point that tends to get referenced by OPEC is the “Secondary Sources” estimates of actual oil production. The last Secondary Sources data was in the OPEC Monthly Oil Market Report April 2019 that had data for March 2019. For March, Saudi Arabia was 517,000 b/d below their voluntary limit and OPEC overall was 442,000 below their voluntary limit. For Non-OPEC, Mexico is >280,000 below their voluntary limit, which means the total Non-OPEC group is likely at least 240,000 b/d. This means Saudi Arabia could keep within the Al Falih stated commitments and still increase its oil production/exports by >400,000 b/d in June to meet customer demand. The overall increase in June could be higher as other countries join the Saudis.
OPEC MOMR Secondary Sources For Mar 2019 Vs Quota Cut Levels
The stage is set for increasing Saudi oil exports in June – customers are asking Saudi for more oil for June deliveries to replace Iranian barrels. It looks like the stage is being set for Saudi Arabia to increase oil exports in June. Al Falih’s first priority is being met – customers are asking Saudi Arabia for more oil for June deliveries, more oil than already planned from Saudi Arabia ie. to replace Iran and Venezuela oil. We couldn’t help but notice the Bloomberg terminal story this morning “Top Oil Buyers Said to Ask Saudis for More Crude in Supply Hunt’ that said “Asian refiners are asking Saudi Arabia for more crude as buyers in the world’s top oil-consuming region face supply disruptions from Iran to Venezuela, according to people with knowledge of the matter. Customers are seeking additional cargoes for loading in June and July from OPEC’s biggest producer, said the people, who asked not to be identified because the information is confidential. The requests are for supplies on top of what the refiners are due as part of term contracts with state-run Saudi Aramco, they said. The scramble for shipments follows a U.S. decision to end sanctions waivers for buyers of Iranian oil after current exemptions expire on May 2.”
Reminder, OECD oil consumption is estimated 0.8 mmb/d higher in Q3/19 vs Q2/19. Our April 23, 2019 blog “Iran Sanctions – US/OPEC+ Oil Export Increases Are Not Enough To Lower Oil Prices” [LINK] reminded that, every year, global oil demand has a large seasonal increase in Q3 vs Q2. The increasing summer oil demand is not a 2019 event, rather it is the normal seasonal increase in OECD oil demand that happens every year. Last year, OECD Q3/18 oil demand was 0.9 mmb/d more than Q2/18, and this year, the IEA forecasts OECD demand to be 0.8 mmb/d in Q3/19 vs Q2/19.