Although the words came off a published interview rather than a live news conference, they reflected the vintage Khalid al-Falih we knew—calm, measured and dignified in providing just the right assurance the oil market needed after its worst selloff in six months.
The Saudi Energy Minister’s interview with the Arab News had all the ingredients to save the day for oil bulls. Crude prices bounced 2% in Monday’s European trading after Falih brushed off talk of disunity in OPEC’s ranks. He assured that the cartel and its main ally Russia would not flounder in their attempt to balance the market with cuts when they meet later this month. “We will do what is needed,” he said. And yes, that meeting is still on June 25 as scheduled, not some undisclosed date in July as widely speculated, he said with a cool finality.
Yet, despite Falih’s assurances, oil still settled Monday’s trading lower in New York, extending last month’s tumble of 16% in U.S. crude and 11% in the U.K. benchmark that had lived up to the “sell in May and go away” adage.
That’s not all. The $53.25 per barrel close for the West Texas Intermediate was the weakest since Feb. 12. U.K. Brent, meanwhile, finished at a four-month low of $61.28. Both benchmarks were in bear market territory, having lost 20% from highs hit in April.
Trade Wars Trump All Other Positives In Oil
Once again, fear of damage to the global economy from the Trump administration’s multiple trade wars had trumped oil bulls.
Falih’s interview wasn’t the only bullish news in Monday’s market.
The Wall Street Journal reported that both Mexico and China were ready to talk, to find a solution to their conflicts with U.S. President Donald Trump.
There was a major explosion reported at a refinery in Cameroon and a few Norwegian oil unions were calling for a strike.
Russia was reportedly backing off its support of embattled Venezuelan President Maduro that could lead to more armed clashes on the streets of Caracas, heightening political risk in the heart of South America.
Over in the Gulf, U.S.-led forces blew up three oil tankers in Syria as the U.S. increased its pressure on Syria by thwarting the oil trade between the PKK/YPG and the Assad regime.
Last but not least, Saudi Arabia raised its crude price to Asia, signaling strong demand, even as it cut prices to the U.S. and Europe.
That oil could still close lower with all this begs the question: can OPEC’s voice alone rise above the ‘noise’ of the trade wars in the market now?
With the second most important OPEC meeting of the year just three weeks away, it’s certainly worth asking. The June 25 event is one that oil bulls hope will plug the current selloff in the market, and restore at least some of the gains lost over the past month.
Just in early April, crude futures were up as much as 40% on the year, hitting 2019 highs of $66.60 for WTI and $75.60 for Brent from the combination of OPEC production cuts and U.S. sanctions on Iranian and Venezuelan crude exports.
Since then, the escalating U.S.-China trade row has had a greater impact on the market's narrative. That was before last week’s threat by Trump to impose tariffs of 5%-25% on Mexico, which broke the last vestiges of the market.
OPEC Faces Enormous Decline Of Faith In Oil Demand
John Kilduff, founding partner at New York energy hedge fund Again Capital, thinks OPEC will have a hard time proving the relevance of its highly-disciplined production cuts amid the enormous decline of faith in oil demand.
Said Kilduff:
“You really have to admire the level of discipline and compliance that the Saudis and rest of OPEC have been showing to the production cuts, notwithstanding Russia’s feet-dragging.”
“Despite this, I think the cartel has grossly underestimated the negative impact on oil demand from Trump’s various trade wars. Without a resolution in any of these trade conflicts in the next three weeks, OPEC could be speaking to a market that’s more keen in selling than listening. Of course, every barrel cut today will matter to the future underlying floor of the market. But it’s the ‘now’ that OPEC needs to win and they seem to have another crisis of confidence from the market on that.”
With summer officially kicking off in less than three weeks, strong refiner demand for gasoline, typical at this time of year as the U.S. driving season kicks into high gear, hasn’t emerged. Crude oil inventories decreased by just 0.28 million barrels in the week to May 24, compared to a forecast draw of 0.86 million barrels. It rose by an average of 5 million barrels in the two previous weeks due to weak refinery runs.
Goldman Sachs warned at the weekend that “escalating trade wars and weaker activity indicators have finally caught up with oil market sentiment”.
Olivier Jakob, analyst at Petro Matrix in Zug, Switzerland, added on Monday:
"Speculators are not taking any chances, and are reducing further their net length in crude oil futures. There is likely more clearing of positions that needs to be done."
Even Phil Flynn, senior energy analyst at The Price Futures Group in Chicago, who typically has a bullish outlook on oil, admitted that “a lot is going on” on the negative side, “giving traders who love volatility more than they could ask for”.