The Russian Aframax oil tanker LANA (9256860), after 15 months spent in
transit, anchorage and under arrest, now appears to be heading for Syria
with her Iranian oil cargo of over 785K barrels, 21 November [photo
credit: @TankerTrackers]
First, the oil price. In the time between the October meeting and my drafting this piece the price of Brent crude
has fluctuated between around US$87 and US$98 per barrel (pb). However
in the past few days it has slipped to US$83. This strongly suggests
that Saudi Arabia in particular will press for a further cut in output
consistent with what is widely believed to be a firm instruction from
Crown Prince Mohammed bin Salman to put a US$100pb floor in the price.
Second, the global economy. That Brent has been below US$90pb since
17 November is, perhaps, surprising when, at that very time, we saw what
The Economist describes as a “rare surge of optimism…running through financial markets.” This has been driven by:
— Lower than expected US inflation in October;
— A very sharp drop in natural gas prices in Europe relative to the August peak; and
— In China, the announcement of a support package for the near-submerged property market and some easing of the still draconian zero-covid policy.
The visible consequences of this included a 13% surge in stock
valuations globally since mid-October and massive inflows of foreign
money into China, more than making good the outflows which followed
President Xi Jinping’s unveiling of the new members of the Standing
Committee of the Chinese Communist Party’s Politburo. Yet, as The Economist makes clear:
- In the US inflation, which remains well above 7%, is dropping
principally because COVID-related supply chain disruptions are easing.
Against the backdrop of a very tight labour market, there is no sign yet
of the Fed
taking its foot off the brake. Indeed, some economists believe that a
recession may be necessary if inflation is to be brought back into line
with the Fed’s 2% target;
- In Europe, natural gas prices have gone down by two-thirds
principally because the EU has exceeded its 2022 pre-winter storage
targets (an exercise which will have to be repeated next year in
possibly even more challenging circumstances.) However, inflation seems to be entrenched and the near-consensus is that the economy is heading into a deep recession from which it will only recovery slowly;
- As for China, even though macro-economic conditions are hardly
favourable we might see a mild near-term cyclical upturn in the property
market; but structural factors such as demographics and China’s
position on the urbanisation S-curve argue against a strong and sustained recovery. As for COVID, last week’s rapid reversal
of what turned out to be a very short-lived easing confirms that any
significant relaxation in the absence of a more effective vaccination
programme and some measure of herd immunity is most unlikely, especially
with new infection levels
at their highest this year already even though the northern hemisphere
flu season is still barely under way. As for the sharp rise in
anti-lockdown unrest, the bind in which the authorities find themselves
can surely only encourage a crackdown.
It is, in my view, unlikely that OPEC+ will be as headline-driven as investors appear to have been.
Third, and on the other hand, the EU oil embargo
against Russia comes into force on 5 December. Some have argued that
it is rather odd for OPEC+ to be meeting just one day earlier. However,
it will take time to see how effective the embargo is and what impact it
has on the price of crude generally, especially given the additional
uncertainties which the G7-proposed price cap
on Russian oil would bring. In the circumstances, it would make sense
for OPEC+ to ignore this until it meets again in early February.
Fourth, Saudi/US relations. To date at least, we have no real indication of what President Joe Biden’s
promise of substantive retaliation against Riyadh for the October cut
means in practice. Coupled with MbS’s recently determined immunity from prosecution
in the US, this must surely encourage Riyadh to believe that it can
double down with impunity. Furthermore, I can see no reason why MbS
would want to risk his carefully nurtured relationship with President Vladimir Putin
at this time. Nor can I see him seeking to help Mr Biden immediately
after Donald Trump has formally put his hat in the 2024 election ring.
Putting all four of these factors together suggests that the context
in which OPEC+ will be meeting in December has moved on somewhat since 2
November when, writing in Gulf News,
oil expert Mohammed Al Asoomi argued that: “…all options are on the
table with regard to the December meeting, but no one expects the group
would take decisions that contradict its interests, which is to ensure
supplies, market balance and fair prices”.
For starters, and perhaps most significant of all, Brent sat just
above US$98 at that time despite softer overall market sentiment then we
have seen recently. Thus, and even though I have no inside line on
this, the probability of an increase in output looks to be asymptotic to
zero. Indeed, my best guess is that we shall see a further cut in
output on 4 December, albeit more modest than the one we saw in October.
And I am still sticking to my US$80-90pb call for Brent come 31
December.