By Barani Krishnan
Investing.com - All hail the newly-reaffirmed OPEC tsar, Vladimir Putin.
As though Abdulaziz bin Salman hasn’t had enough surprises over the past few weeks, the Saudi Energy Minister got another jolt on Friday when he learnt Moscow wasn’t ready to agree to additional supply cuts proposed by Riyadh and other allies in the Organization of the Petroleum Exporting Countries.
The deeper reductions, as anyone in the oil market knew, were key to restoring confidence for investors to start bidding up crude prices again in the bear market for oil.
Whether the cuts are really necessary — exactly the point that stalled Russia’s decision — is debatable, because no one really knows how much longer and worse China’s coronavirus crisis could get.
The logical theory is once a cure is found for the pathogen, demand for oil — and pretty much anything else that China buys by the gazillions — should soon fix itself.
Yet, like in any crisis, multiple remedial efforts are needed to assuage people that everything humanly possible is being done — until that definitive solution comes along.
In oil’s case, common sense tells us that the OPEC plan to curb another 600,000 barrels per day, on top of its earlier pledge to take away 1.2-2.1 million bpd, could go a long way in placating a market that Bloomberg estimates has lost 3 million bpd of Chinese buying in just three weeks.
Yet, that's not the way the Kremlin sees it.
In the words of Energy Minister Alexander Novak, Russia needs more time to decide whether to join additional oil output cuts proposed by OPEC because it believes U.S. crude production growth could slow while global demand remains solid.
Now, we've all heard of peak shale and how U.S. oil output could get into a steady decline. Despite this, the U.S. Energy Information Administration keeps forecasting higher and higher production with each passing year. For instance, Energy Secretary Dan Brouillette said on Friday that the current U.S. record production of 13 million bpd could reach as high 15-to-16 million in coming years.
Many will agree with Brouillette on shale's promising prospects, peak oil or not. But it's hard to imagine anyone agreeing to Novak's theory that demand for oil is solid when refiners are visibly taking less crude and airlines consuming less jet fuel with each passing day of the coronavirus crisis.
Of course, we also know that whatever we heard from Novak wasn't decided by him, because nothing as important as this for Russia could have been decided by anyone other than its president, Putin.
What’s odd is that the Russian indecision on OPEC comes less than a week after Putin and Saudi King Salman bin Abdulaziz discussed the global energy market in a phone call Monday evening, where both leaders affirmed their “readiness to continue cooperation within OPEC+,” according to a statement by the Kremlin.
But anyone who has followed OPEC long enough will also know that while Saudi Arabia officially leads the 13-member cartel, Russia’s clout as an ally of the group has grown immensely in recent years, given Moscow’s higher output of crude. While the United States is the world’s number one producer of oil, the independent structure of U.S. drillers prevents the country from participating in any OPEC cuts, leaving the cartel at the mercy of Russian cooperation.
Since the first round of the Riyadh-Moscow engineered cuts in 2016 that launched the so-called OPEC+ manipulation of oil supply, the Saudis have become increasingly reliant on Putin to do part of the heavy lifting within the group to raise crude prices. This is despite the Saudis contributing the lion’s share in each round of the cuts and the Russians barely meeting their targets.
For the first time in recent memory, this week’s OPEC meeting was extended for a third, unscheduled day by Russia’s dragging of its feet on the supply reduction plan. Notwithstanding the drama, Putin could decide by as early as Monday that the additional 600,000 bpd cut is necessary, and crude prices could get a lifeline.
Still, our point is this: Abdulaziz had looked fiercely independent when he took Saudi Arabia’s top oil job and stewardship of OPEC in September, promising to act tough on overproducing members and “go it alone” if necessary to keep the market balanced. The coronavirus crisis has exposed just how vulnerable the Saudis and rest of OPEC are without their key ally Russia.
Like his predecessor Khalid al-Falih, Abdulaziz is also coming to realize that while he sits at the throne of OPEC, the real boss of the cartel is effectively Putin, who doesn’t attend a single meeting of the group.
Leaving oil aside, where does the coronavirus crisis leave gold?
That seems to be another undecided question as gold futures posted their first weekly loss on Friday while remaining above the key $1,500 per ounce support — creating a conundrum for investors on near-term direction in the yellow metal.
Oil prices posted a fifth straight weekly loss on Friday.
Brent, the London-traded benchmark for crude oil, settled down 46 cents, or 0.9%, at $54.47 per barrel.
New York-traded West Texas Intermediate, U.S. crude benchmark, settled down 63 cents, or 1.2%, at $50.32
For the week, Brent fell 6.3% and WTI 2.4%. Combined losses over five weeks stood at more than 22% for both benchmarks, leaving them into bear market territory.
“Oil prices can’t shake off the coronavirus,” Phil Flynn, senior market analyst for energy at the Price Futures Group in Chicago, said.
“Conflicting reports about how well the virus is being contained is raising fears about economic growth” even as OPEC struggles to find a way to support the market from collapse, Flynn said.
OPEC had committed to cut as much as 2.1 million barrels per day, or about 2.1% of global demand, this quarter even before the coronavirus outbreak, which has killed more than 630 people and infected another 31,000 in China while spreading to at least 25 countries.
OPEC’s proposal to cut another 600,000 bpd to offset demand fears over the pandemic has been stalled by Russia.
Oil ended January with the worst monthly loss in more than a year as whole industries from auto manufacturing to travel in top energy buying China were crippled by the viral pandemic.
Energy Calendar Ahead
Monday, Feb 10
Private Genscape data on Cushing oil inventory estimates
Tuesday, Feb 11
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Feb 12
EIA weekly report on oil stockpiles
Thursday, Feb 13
Friday, Feb 14
Baker Hughes weekly rig count.
Precious Metals Review
Gold prices held rock-steady above the $1,500 level critical to market longs as futures of the yellow metal posted its first weekly loss in seven on Friday after profit-taking on the recent run-up fueled by the coronavirus scare.
Gold futures for April delivery on New York’s COMEX settled up $3.40, or 0.2%, at $1,573.40 per ounce, gaining for a third day in a row.
But on a weekly basis, April gold fell 0.6%, the first time it has slid in a week since mid-December, Investing.com data showed. The drop came at the end of a relatively choppy week in gold as some investors took profit on recent gains after global scare over the coronavirus eased somewhat.
Spot gold, which tracks live trades in bullion, was up $5.62, or 0.4%, at $1,572.18 by 2:40 PM ET (19:40 GMT). On a weekly basis, the bullion indicator was down 1.1%, its first slide in three weeks.
Gold’s weekly loss was mitigated by a drop in U.S. stock markets, which ignored a bullish U.S. jobs report on Friday to tumble over lingering concerns about China’s struggle to contain the viral pandemic that has already killed more than 630 people and infected 31,000 more in the world’s second largest economy.
“Gold is still a hedge for political, economic and stock market headlines that can cause quick reversals,” said George Gero, precious metals analyst at RBC Wealth Management in New York. “Expect the $1550-1600 trading range in gold to continue.”
Gold prices came within striking range this week of the $1,600 level as investors initially piled into the yellow metal for a hedge against the weakness in global markets.