Yesterday we had a look at the effects that President Trump's "unorthodox" methods and actions were having on the US dollar. Well, let's face it we could write about Mr Trump every day, and often it's difficult not to. Today would be a case in point, such are the market anxieties provoked by the latest "revelations" of what of this particular leader of the free world may or may not have been up to. It's not just the dollar either, though the US unit did oblige with its biggest one day fall since July. US stocks had their worst day since September, and all the familiar "risk-off"safe-havens were in big demand : Jap Yen, highly-rated Government Bonds (esp. US Treasuries), Gold.
It's no wonder Mr Trump has all the headlines, but traders have got to cast their gaze beyond a White House under siege. For instance, this time next week (Thurs 25th May) OPEC members will meet in Vienna, with a few key non-OPEC producers in attendance of course. The purpose of the get-together will be to agree on an extension to the production cuts announced last November -- 1.3m barrels per day (bpd) within OPEC, 500,000 bpd form other producers , mainly Russia. The news of the original six-month deal in November prompted a rally in prices that was welcomed by producers, but by early May the market had given back all its gains.
The problem has been that the record high level of inventories of crude oil, the main target of the deal, has been stubbornly hard to shift. For once, OPEC cannot be accused of non-compliance with their own quotas. All have come at least very close to matching agreed output, and some have at times cut by more than they were obliged to. Those looking for reasons why prices are back where they started would point out however that although production levels may be down , exports of oil are barely changed as exporters have made up the difference out of their own oil reserves.
But by far the biggest reason why the oil rally went into reverse was the resilience of U.S. shale oil producers, a factor badly underestimated by OPEC (and others). When the original deal to cut production was struck six months ago, OPEC was of the opinion that lower prices forcing shale rigs to close down would see U.S. production fall by 150,000 bpd in 2017. How wrong they were. A combination of technological advances and old-fashioned cost-cutting means that many shale producers are happy to operate with oil at $50 per barrel, a level not previously considered viable for most shale rigs. Now OPEC expects U.S. production to rise by 820,000 bpd this year -- a miscalculation of nearly 1m barrels per day.
1m bpd may not be an earth-shattering number in the greater scheme of things, but it does explain why enormously high levels of crude inventories in the States have been so hard to shift.
The last couple of weeks have finally seen some noticeable drawdowns in crude stocks and explains the small bounce we've seen in prices, but for it to mean anything serious, OPEC and their confreres simply must come up with something constructive next week. The talk for some time has been of a six month extension to the current deal, taking it to the end of 2017. In most people's eyes, this is an absolute minimum. Not to agree on even this would be a disaster for prices so we'll assume for a moment (possibly very unwisely) that it's a foregone conclusion -- most of the thirteen members have publicly supported the idea, at any rate. The question is, will they extend the cuts for a further nine months, until the end of March 2018 ?
That's the proposal favoured by Saudi Arabia (OPEC, and the world's largest exporter), Russia (non-OPEC, and the world's largest producer) and Kuwait (another OPEC heavyweight). We read somewhere this morning that the likelihood of that happening is around 60%. Actually, we're surprised it's not higher given how much producers have to lose if they're not judged to be making bold moves to dramatically reduce inventories and get supply and demand back in balance. But then again, you've got to remember that the recently harmonious front presented by OPEC is an exception rather than the rule, and members have differing needs and priorities.
The FT's point is that OPEC are of course aware of the need to be seen to take constructive action, and at the same time they're realistic enough to understand that they can only expect to achieve so much. The suggestion is knocking around that they might not extend the deal beyond six months but deepen the cuts instead. That probably would cause a quick drawdown in inventories and a spike in prices, but it's one that's likely to be short-lived and what's worse it would bring the shale players even more strongly into play.
Never say never when it comes to OPEC but it seems much more likely that they'll take the view that a lengthy period of more modest cuts will achieve their reduced goals. Gone are the days when OPEC could do pretty much what it pleased, and you get the impression that they'd rather settle for an oil price around $60 (or a fraction more) than risk the calamitous prospect of $40 oil once again.