Crude oil prices are soaring after Saudi Ariba and Russia said they have agreed to extend oil production cuts beyond the agreed upon deadline for another nine months. That means both Russia and Saudi Arabia will extend cuts to March of 2018 at a time when we are seeing evidence that the prior cuts are just starting to have an impact. It appears that the oil cuts had a lag time to get the market in balance as U.S. shale producers increased output but also as traders dumped oil from floating storage and releases of oil from the U.S. Strategic Petroleum Reserve.
But now with rising demand and a commitment by Russia and Saudi Arabia to extend cuts, we could see the recent five-week drop in U.S. oil inventories continue for the foreseeable future. Add the potential default of Venezuelan bonds and the upcoming Iranian election, and we could see more support as prices get back what they gave back in the month of April. The extension of the cuts may drive global inventories below the five-year average as demand starts to rise.
Saudi Arabia's energy minister, Khalid al-Falih, was serious when he said he would do whatever it takes to get global supply back to the five-year average. Dow Jones reported that Russia and Saudi Arabia, in a joint statement after a meeting of the Group of 20 countries in China, oil ministers from the world's top two top crude producers said they would consult with other nations on the need to extend the output cut. "There has been a marked reduction in the inventories, but we're not where we want to be in reaching the five-year average," Saudi Arabia's energy minister Khalid al-Falih said. "We have, before coming to this announcement today, reached out to many of our colleagues within and outside OPEC, and I think there is consensus that this is the right approach and the right thing to do," he added. "The agreement needs to be extended, as we will not reach the desired inventory level by end of June," Al-Falih added.
Russia's energy minister Alexander Novak added, "Therefore, we concluded that ending will probably be better by the end of first quarter 2018. Preliminary consultations show that everybody is committed...I don't see reasons for any country to quit."
The extension of cuts is very bullish as the situation in Venezuela is getting darker. Dow Jones reports that, “Bondholders looking for compensation if Venezuela defaults know that one big pot of money remains: the assets of state-owned oil refiner Citgo Holdings Inc., but there is a problem. Dozens of companies are lining up with claims on those same funds. Venezuela last year pledged all of Citgo's equity as collateral to bondholders and to state-owned Russian oil producer Rosneft in debt deals. In addition, at least 43 companies, including ConocoPhillips Co. and Canadian mining firm Crystallex International Corp., are pursuing legal claims against the government, according to World Bank's International Center for Settlement of Investment Disputes.
These companies say they were stiffed when Venezuela's government expropriated their assets there.Now with Wall Street judging that a default may only be a matter of time, it is becoming clear that there isn't nearly enough of Citgo to go around. "There are more hands out than there are assets to pay them," said Russ Dallen, a partner at investment bank Caracas Capital Markets, based in the Venezuelan capital.
A default would trigger rights enabling any of the claimants to attempt to seize Citgo, triggering cross-default clauses in Venezuelan sovereign bonds if they remain unpaid once a final court order is issued, according to Credit Suisse. Attorneys say that would send creditors into a frenzied legal battle for assets that could take years to resolve. Stay tuned! This could drive Venezuelan oil output to a halt.
Iran’s economy is also in a shamble, raising concerns about who is going to be the new president. The LA Times says that centrist-leaning President Hassan Rouhani faces an uphill battle for a second term. A poll by the Iranian Students Polling Agency last week showed that while Rouhani remains in the lead with 41.6%, two conservative opponents are catching up. Consequently, Rouhani has changed his campaign rhetoric this week by criticizing his rivals, including the powerful Islamic Revolutionary Guard Corps. The change in tone, some experts say, is reminiscent of his 2013 presidential campaign strategy. The outcome could shake up oil if a hardliner gets in power.
We still think oil is headed toward $46.00 per barrel and then to $73.00 by the end of year!