Oil below $98: when will Saudi close the taps?
Weak economic data and elevated supply pull prices to annual lows
Oil has continued its slide after a series of weak financial data and fears for the Eurozone occlude prospects of demand recovery and geopolitical concerns over Iran.
The benchmark Brent contract for July dropped a further $1 to $97.51 by 0231 GMT according to Reuters, matching a low last touched in February 2011.
Brent topped $128 in March as encouraging contemporary data and fears over reactions to Iran’s nuclear program saw huge net long positions taken out by investors. Oil markets have already largely adjusted in anticipation of Iranian sanctions, and there are signs that the EU will exempt tanker insurance from the sanctions regime if either Iran meets its demands or oil prices spike again.
The immediate trigger for a further fall was a weak US non-farm payroll report, showing just 69,000 net hires in May, causing unemployment to tick up.
A slew of data from China from rail freight numbers to industrial electricity usage also suggests the country’s economy may be flat-lining or even in recession. The country has been turning away shipments of coal and iron ore, and the latest PMI manufacturing score showed the sector slowing significantly.
Meanwhile, the Bank of International Settlements is the latest institution to warn that a breakup of the euro is already happening in credit markets, as investors drain capital from Greece and Spain back to Northern Europe. Economic commentators believe that, even if Germany does enough to keep Greece in the Eurozone, it is unlikely to make the changes necessary to its domestic economic policy needed to allow South Europe to recover.
A price drop has been aided by a more sanguine supply picture, as Libya maintains its pre-war output level and Iraq’s exports have increased, subject to weather disruptions on the Arabian Gulf.
Both Kuwait and Saudi Arabia have said that $100 is a reasonable level for crude, with Saudi Oil Minister Ali Naimi explicitly targeting the price level, and Saudi Aramco CEO Khalid Al Falih saying the Kingdom is currently pumping 10 million barrels a day, an excess of 1.5 million barrels per day over the level demanded. A recent IMF report estimated the countries’ budget breakeven price for Brent at $49 and $80 respectively.
The question is, assuming the macroeconomic picture continues its current trend, at what point Saudi and Gulf suppliers begin easing back on production, with analysts pegging the turning point at $90.
No doubt the Gulf bloc will be under pressure from Venezuela, Iran, Iraq, Algeria and Libya, all of which begin to run deficits as Brent falls below $100. Iran only managed to export an average of 1.5 million bpd in May, down around 800,000 bpd on the year, and is storing millions of barrels offshore.
Oil Minister Rostam Qasemi has claimed, via state news service Press TV, that recent meetings with Iraqi premier Nouri Al Maliki have yielded “a unified stance on oil production quotas.” Qasemi's statement is of little direct immediate importance, given Iraq is currently outside the quota system and Iran is flunking its quota.
It is, however, a clear sign at Iran’s frustration that gulf suppliers have rushed in to make up the cartel-wide quota, further marginalising Iran and other OPEC producers without spare supply capacity in doing so.
Iran instead wants to see OPEC producers stick to their stated 30 million bpd output ceiling, which the cartel is currently exceeding by around 1.3 million bpd.
Oil & Gas Middle East will be covering the next OPEC conference from Vienna, when the group will review its 30 million bpd cartel-wide production target.