Three important developments for the oil market occurred this week. They should impact prices over the the long-, medium- and short-term.
1. Saudi Oil Reserves
Saudi Arabia released the official results of a third party audit of its oil reserves. According to petroleum consultants DeGolyer and MacNoughton, the Kindgdom’s oil reserves stand at 263.1 billion barrels (this figure does not include Saudi Arabia’s share of the oil in the neutral zone area that it shares with Kuwait).
The release of this information is significant for two reasons. First, it proves the skepticism about Saudi Arabia’s self-reported reserves has been unfounded. Clearly, Saudi Arabia was not misleading the public about the size and recoverability of its oil.
Second, Saudi Arabia has chosen to release this information ahead of a planned bond sale during the second quarter of the year by Aramco. This sale is intended to raise money for Aramco’s planned purchase of Saudi petrochemical giant, Sabic (SE:2010). According to Saudi oil minister Khalid al-Falih, the bond sale will include the release of some Aramco accounting figures. It seems clear that the announcement of the official reserves numbers at this time is designed to bolster Aramco’s bond offering.
2. Iranian Oil Exports
Preliminary data from December 2018 shows that Iran’s exports are within the range expected, according to the Significant Reduction Exemptions (SREs) granted by the United States. If anything, Iran’s exports for December are slightly under what would be expected. 950,000 barrels per day is the amount of oil allowed to be purchased by the eight countries permitted to import Iranian oil under the new US sanctions regime.
This does not include Greece, Italy and Taiwan, which did not disclose their SREs. According to TankerTrackers.com, Iranian oil exports totaled almost 942,000 barrels per day in December, which is below the permitted amount. Known exports to India, China and Turkey were all below their SRE quotas. However, about 370,000 barrels per day of oil is still in transit with no clear destination.
Traders should expect that Iran’s exports to the SRE recipients will grow as these countries clear the logistical hurdles involved in resuming purchases of Iranian oil and jumping through the financial hoops the US has set up. In fact, India recently said that it has started paying for its Iranian oil entirely in rupees (it previously paid in a combination of rupees and euros). Iran will be able to use the rupees to pay for Indian products as is permitted under the SRE policy.
Of course, just as these logistics are coming into place, the SREs will be up for reevaluation by US policymakers who may decide in April to revoke them entirely.
3. Additional Saudi Production Cuts?
Crude oil prices are on the rise after their December plunge.
Crude Oil Weekly YTD
The increase in prices is being fueled by positive news regarding the US-China trade dispute and verification that OPEC producers are cutting production. More specifically, Saudi Arabia announced that it has cut oil exports in January to 7.2 million barrels per day and will cut even more in February, to 7.1 million barrels per day. Al-Falih said that Saudi Arabia has already lowered its oil production to 10.2 million barrels per day even though it only agreed to cut 10.311 million barrels per day at the last OPEC meeting.
The Wall Street Journal reported that an OPEC official said the Saudis are targeting a price of $80 per barrel. This may be a price they would love to see based on Saudi Arabia’s 2019 budget, but it is not a realistic target right now and the Saudi oil minister knows this. Saudi Arabia may be cutting its oil production more than it committed to, but do not expect it to cut much further in this market.
Saudi Arabia is targeting Chinese buyers and will need to maintain exports at a certain level if it does not want to cede its newly regained status as the top oil supplier to China. Even though Russia and Saudi Arabia are working together in the OPEC-Non-OPEC cooperation framework, they are competitors in an increasingly tight Chinese market.