Yesterday’s oil price action looked quite suspicious. The price of crude plummeted 2.5% over the course of two hours, and then shot right back up over the next 90 minutes, erasing all of its losses. The catalyst that seemed to lead to the sudden selloff was equally strange. Everyone's favorite cartel, the Organization of Petroleum Exporting Countries, released its highly watched Monthly Oil Market Report, which reported that Saudi Arabia’s oil production in July had fallen by 52,800bpd.
Strange. When is the last time a report of a cut in production led to a plummeting oil price? Why did this happen? Because in that same report, OPEC revised down its previous estimates for global oil demand growth compared to the same report published a month before. Markets interpreted this as more bearish than the bullishness of a production cut, and oil prices fell.
Imagine being the Crown Prince of Saudi Arabia. You have President Donald Trump to thank for getting into power thanks to a bloodless coup that involved the imprisonment and shakedown of much of the royal family. You’ve made promises to Trump to increase production for the sake of keeping the oil price down, at least until midterm elections in November. Yet you’ve been running enormous budget deficits since the oil price collapse of 2014, much worse deficits than the oil price collapse of 2008, the biggest deficits since the first Gulf War. Not only that, but your Saudi 2030 economic plan includes enormous public spending increases.
What you want is to keep your promises, especially to President Trump for a low oil price, while at the same time priming the oil price to really take off in November after the midterm elections. The best way to do that would be to decrease production now without it upsetting the oil price higher just yet. That way you can set the stage for a much higher oil price come November, with production already down but the effects having been delayed by forecasts of falling demand published in a report you pretty much control.
The market took the bait, and oil held steady on net for the day. We'll see if it keeps holding.
It is also no coincidence that sanctions against Iran will only go into full force after the midterm elections in the US. Judging by the most recent lull in Iranian crude production while the previous round of sanctions were in full effect, Iranian oil exports should fall by about 800,000 bbl/d, if the past is anything to go by.
Meanwhile, Venezuela’s production has already fallen 44%, or 1.13M bbl/d with virtually no chance of regaining lost production any time soon, given that the country is in full economic collapse mode amid reports of chaos and starvation.
Taken together, the price action in oil yesterday seems to be signaling that come November, the price of oil, and probablymany other commodities with it, will be heading much higher.
Disclosure: Long XLE.
