Is Saudi Arabia Signaling The Target For Rebalancing Oil Will Be Less Than The 5-Year Average Of Oil Inventories?

Nov 28, 2017


Oil trading today and tomorrow will be all about the chatter and speculating if OPEC and Russian will extend its cuts on Nov 30.  For the past couple months, the clear expectation has been an extension for a 9-month extension of the cuts to the end of 2018.  WTI has been very strong and has moved to high $50’s on the expectation for the extension. At 6am MST, WTI has moved off its bottom this morning and is now only down $0.39 to $57.68.  We are a little surprised it hasn’t moved a little weaker and that Saudi oil minister al-Falih’s comments aren’t getting much market attention this morning, or at least his saying ““What is a normal level of stocks? This is a technical matter and this needs talks with other parties”.   It seems that Al-Falih could be suggesting there could be some other definition for normal or the target.  In theory, this could allow them to put a lesser target in and they are further along to being rebalanced.   There is logic to using a different period.  It means that OPEC and Russia can say that rebalancing will be reached way sooner, but it is moving the goal posts closer versus the expectations of correcting to the 5-year average.

What did al-Falih say?  Gulf Business (UAE based) story” Saudi energy minister coy over oil output cuts[LINK] noted “Saudi Arabi’s energy minister Khalid Al Falih told reporters to wait for the results of this week’s OPEC meeting in Vienna, after being quizzed about how long global oil producers might extend their system of output cuts.  Speaking at the Gulf Petrochemicals & Chemicals Association Annual Forum in Dubai today (Tuesday), the minister hinted as difficulties ahead at the meeting of the Organisation of the Petroleum Exporting Countries in the Austrian capital on Thursday.  “I haven’t reached Vienna. It is too early to talk about a disagreement, but… according to studies there are differences over the amount of time we need to reach normal levels of stocks,” he said.  “What is a normal level of stocks? This is a technical matter and this needs talks with other parties.  “The only solution is to wait until we reach Vienna and hear the committee that will be convened tomorrow for surveillance and headed by the Kuwaiti and Russian oil ministers. We will hear everyone and reach a solution that is agreeable for both producer and consumer markets.”

Is he suggesting moving the goal posts closer and rebalancing is reached at a higher global oil inventory level?  Al-Falih’s comments on normal inventory are what got our attention, but isn’t seeming to resonate with the market this morning.   The target for rebalancing has been clear, its getting global oil inventories to the 5-year average and the 5-year average was the marker for normal inventory levels.  This is where inventories have to get to be rebalanced.  However,  Al-Falih seems to be suggesting there could be some other definition for normal or the target, which likely infers some lesser period which would move the target line lower.  In theory, this could allow them to put a lesser target in and they are further along to being rebalanced.   There is logic to using a different period.  It means that OPEC and Russia can say that rebalancing will be reached way sooner, but it is moving the goal posts closer versus the expectations of correcting to the 5-year average.

No surprise, he notes there are differences on the time to reach “normal” levels of stocks.  We initially focused on his comments that there are “differences in the amount of time” thinking they were getting into a debate on supply and demand forecasts.  But we realized that isn’t likely the case.  Rather, it’s the linkage to normal levels of inventory and what is considered normal that likely leads to the differences in the amount of time to rebalance.

It seems like a logical way to get Russia on side with an extension.  Russia has been the wildcard for the extension even with Putin’s earlier comments.  Oil prices are up strong with the cuts and with the Saudi Aramco IPO and Russia elections in 2018, its hard to see OPEC and Russia abandoning cuts.  We believe a cut extension will happen this week.  But al-Falih’s comments this morning make us wonder if the cuts will be extended, but the goal posts may be moved closer.  If so, that will be below expectations and why we thought oil should be a little lower this morning.

 

Oil trading today and tomorrow will be all about the chatter and speculating if OPEC and Russian will extend its cuts on Nov 30.  For the past couple months, the clear expectation has been an extension for a 9-month extension of the cuts to  the end of 2018.  WTI has been very strong and has moved to high $50’s on the expectation for the extension. At 6am MST, WTI has moved off its bottom this morning and is now only down $0.39 to $57.68.  We are a little surprised it hasn’t moved a little weaker and that Saudi oil minister al-Falih’s comments aren’t getting much market attention this morning, or at least his saying ““What is a normal level of stocks? This is a technical matter and this needs talks with other parties”.   It seems that Al-Falih could be suggesting there could be some other definition for normal or the target.  In theory, this could allow them to put a lesser target in and they are further along to being rebalanced.   There is logic to using a different period.  It means that OPEC and Russia can say that rebalancing will be reached way sooner, but it is moving the goal posts closer versus the expectations of correcting to the 5-year average.

What did al-Falih say?  Gulf Business (UAE based) story” Saudi energy minister coy over oil output cuts[LINK] noted “Saudi Arabi’s energy minister Khalid Al Falih told reporters to wait for the results of this week’s OPEC meeting in Vienna, after being quizzed about how long global oil producers might extend their system of output cuts.  Speaking at the Gulf Petrochemicals & Chemicals Association Annual Forum in Dubai today (Tuesday), the minister hinted as difficulties ahead at the meeting of the Organisation of the Petroleum Exporting Countries in the Austrian capital on Thursday.  “I haven’t reached Vienna. It is too early to talk about a disagreement, but… according to studies there are differences over the amount of time we need to reach normal levels of stocks,” he said.  “What is a normal level of stocks? This is a technical matter and this needs talks with other parties.  “The only solution is to wait until we reach Vienna and hear the committee that will be convened tomorrow for surveillance and headed by the Kuwaiti and Russian oil ministers. We will hear everyone and reach a solution that is agreeable for both producer and consumer markets.”

Is he suggesting moving the goal posts closer and rebalancing is reached at a higher global oil inventory level?  Al-Falih’s comments on normal inventory are what got our attention, but isn’t seeming to resonate with the market this morning.   The target for rebalancing has been clear, its getting global oil inventories to the 5-year average and the 5-year average was the marker for normal inventory levels.  This is where inventories have to get to be rebalanced.  However,  Al-Falih seems to be suggesting there could be some other definition for normal or the target, which likely infers some lesser period which would move the target line lower.  In theory, this could allow them to put a lesser target in and they are further along to being rebalanced.   There is logic to using a different period.  It means that OPEC and Russia can say that rebalancing will be reached way sooner, but it is moving the goal posts closer versus the expectations of correcting to the 5-year average.

No surprise, he notes there are differences on the time to reach “normal” levels of stocks.  We initially focused on his comments that there are “differences in the amount of time” thinking they were getting into a debate on supply and demand forecasts.  But we realized that isn’t likely the case.  Rather, it’s the linkage to normal levels of inventory and what is considered normal that likely leads to the differences in the amount of time to rebalance.

It seems like a logical way to get Russia on side with an extension.  Russia has been the wildcard for the extension even with Putin’s earlier comments.  Oil prices are up strong with the cuts and with the Saudi Aramco IPO and Russia elections in 2018, its hard to see OPEC and Russia abandoning cuts.  We believe a cut extension will happen this week.  But al-Falih’s comments this morning make us wonder if the cuts will be extended, but the goal posts may be moved closer.  If so, that will be below expectations and why we thought oil should be a little lower this morning.