At a Glance
- The Strait of Hormuz, rebounding U.S. production and OPEC meeting reshuffle the most influential oil nations
- No signs of global recession could mean a bounce for oil demand projections
On March 1, we published a piece titled “A Global Tour of Crude Oil: Which Countries Matter Most?”. In that piece we ranked countries in order of their influence over crude oil price movement. This was not meant to be a static list in terms of what country placed where and given the current market environment, it seemed a fitting time to update the ranking. First, the previous list in order of influence:
- United States
- Saudi Arabia
- Iran and Iraq (tie)
So, what has changed? Since our last piece there have been several key developments affecting supply.
Russia pressured OPEC to cancel their May meeting and reassess the oil inventory surplus at the June 26 OPEC+ meeting in Vienna, Austria. Initially they succeeded, but since then an OPEC+ meeting was held in Jeddah, Saudi Arabia on May 15 and it appears that Russia has hinted at production increases. Since there is no official word, this builds some unexpected volatility into crude oil prices as we get closer to the June meeting, considering that the current production cuts agreed to by OPEC+ are set to expire June 30.
Iran Waivers “Going to Zero”
The United States announced it would not renew waivers that let countries buy Iranian oil without facing U.S. sanctions “We will no longer grant any exemptions — we’re going to zero” Secretary of State Michael Pompeo said on April 22nd and any nation continuing to buy Iranian oil will face U.S. sanctions.
This led to threats by Iran to close the Strait of Hormuz, which is a key waterway/chokepoint between the Persian Gulf and the Gulf of Oman. It provides the only sea passage from the Persian Gulf to the open ocean. Roughly a third of the world’s liquefied natural gas and almost 20 percent of total global oil production passes through the strait, and closing it would be a military exercise likely countered by military activities involving Saudi Arabia and potentially the United States.
Russia Halts Shipments
Right around that same time, Russia halted oil shipments via the Druzhba pipeline to several European countries due to a contamination issue. Russia’s oil pipeline operator Transneft told Russia’s TASS news agency that the oil was “deliberately contaminated” at a private terminal and Russian authorities launched a criminal investigation alleging sabotage.
U.S. Top Producer
U.S. production has moved aggressively higher after a slow start to 2019. The four-week moving average for production has moved from 11.675 million barrels per day (bpd) to 12.2 million bpd as of the week ending May 10. This puts the UnitedStates at the top of the list of oil producing nations by approximately 1 million bpd over Russia and just over 2 million bpd over Saudi Arabia.
There have also been developments potentially affecting demand.
On the positive side, the U.S., China and the EU all beat analysts’ estimates for GDP growth, which at worst pushes back predictions of a global economic recession and at best, eliminates them. No global recession means demand forecasts for crude, which have been ratcheted down, need to climb. Also, the summer driving season officially starts June 15 and refinery utilization rates in the U.S., which measure immediate, short-term demand have stabilized around 90 percent and seem to be turning up. 90 percent is a respectable level, but certainly does not indicate booming demand growth, but if they continue to rise, it could be a sign of higher prices in the near-term.
On the Negative side, US/China trade tensions have gotten much worse with no talks scheduled until President Trump and President Xi meet at the G20 in June. If anything can renew calls for a global recession, it’s the intensifying of the trade conflict between these two economic powers.
Based on all this, the new rankings are as follows
Iran: It’s not about Iranian oil this time, it’s about Iran’s military. The largest spikes in oil volatility have come from headlines regarding the military threats in the Strait of Hormuz and if Iran decides to take that action, crude volatility will reach new highs for 2019
Russia: Influence on OPEC and ability or lack thereof to address the contamination problem lands them in the number 2 spot. They will have a very large effect on supply in the coming months.
United States: The world’s largest producer can never fall much below number three, and the U.S. would likely be involved in any military development in the Strait.
Saudi Arabia: Saudi Arabia has the barrel-per-day spare production capacity of the major producers. Any immediate supply shortage that needs replacing, regardless of the cause, will fall on them.
UAE: Rounding out the top 5 and replacing Venezuela is the United Arab Emirates. The UAE produces approximately 3.3 million bpd and has capacity to boost production by 200K-300K more barrels if needed, but it’s their proximity to the Strait of Hormuz that gives them influence in this list. They are on the opposite side of the choke point to Iran and would be the first affect by military action in the region.
This ranking can change quickly, but this time it’s geopolitical as much as it is economic.