A major “Anti-Corruption” shakedown is taking place within the hierarchy of the Saudi’s. A chief market strategist at FXTM has been reported saying “There’s no doubt that OPEC and co. have been a major influencer of the most recent rally, but oil traders have a new political risk to consider, in the coming days and weeks. The anti-corruption crackdown in Saudi Arabia resulting in the arrest of 11 princes, and dozens of senior officials, led many traders to question how oil prices will be affected.” With this detaining of 11 Saudi princes, and dozens of senior level officials, we had seen yet another jump in oil prices. This is seen to have helped bring Brent crude up over the $62 a barrel mark, and at its highest levels in 28 months. Also let us not forget about West Texas Intermediate (WTI) which has risen to its highest levels since July 2015 to $55.84 a barrel.
This Anti-Corruption campaign that had taken place is being seen as a way for the future king of the Saudi’s, Mohammed bin Salman (32 years old), to consolidate his power as well as possibly clear the way to have 5% of the Saudi Aramco empire sold in the near future. His father, King Salman, is 81 years old and will reportedly abdicate the throne in the next year or so due to bad health. The clearing out of these key officials within the Saudi’s oil empire is said to have little to no impact on the plans to move forward with the extension of OPEC/Non OPEC cuts through 2018. Analysts at the RBC Capital investment bank are quoted as saying about the future Saudi King “seems strongly committed to anchoring the OPEC agreement deep into 2018 and moving ahead with the Aramco sale”. Once again we are just waiting on the meeting in Vienna between OPEC and NON OPEC members but given the most recent rhetoric out of the organization we should expect a continued cut of 1.8 mbpd through the end of 2018.
The most recent news that has shaken the oil market today has been that of the Iranian-backed group of Houthis fighters in Yemen that have attempted to hit the Saudi International airport of Riyadh. This missile launch coming out of Yemen is being called a possible “act of war” by the Saudi Kingdom. Bloomberg reported a quote coming from a Saudi-led military coalition, fighting this group in Yemen, as saying “Iran’s role and its direct command of its Houthi proxy in this matter constitutes a clear act of aggression that targets neighboring countries, and threatens peace and security in the region and globally.” This is troubling for the region and for the OPEC group considering that Iran and the Saudi’s are two of the strongest oil producing members of OPEC. Iran denies such accusations.
So what are OPEC/NON OPEC members trying to currently do with extending the supply cuts through 2018 at this point? If you read into what some of the members of OPEC are saying, these supply cuts are a conquest for what they call a “fair price” of oil. Some Russian members have expressed that the $60 a barrel number should be considered close to the “fair price” and that the extension of cuts through 2018 decision should be based off of where the market is when the decision HAS to be made. Where this differs with some of the other OPEC members is when we had seen Qatar’s oil minister saying, as prices past the $60 a barrel mark, that pricing is “moving in the right direction.” Even beyond Qatar making those comments though was Venezuela claiming that the fair price was $70 a barrel and Iraq going even further to say that the levels should be closer to $70-80 a barrel. This clearly shows though that Russia, although on the same page right now with OPEC, may be a little hesitant to continue compliance and hold back from pumping oil when financially it makes more sense just to let it rip and make money.
Lastly, here in the U.S. we have seen yet another decline in the rig count across our country. Last week Baker Hughes reports that rig counts have waned to the tune of 11 across the states. The rigs that went down last week include 8 in the oil fields and another 3 down for natural gas. So does that mean U.S. production is slowing down? Doubtful considering Exxon more than doubled its Permian Basin holdings earlier this year and just recently vowed to increase drilling rigs by 50% by the end of 2018 and increase production in the Permian 45% by 2020. Beyond this a minimum of 7 of the largest U.S. Shale producers have also claimed they will increase production this quarter by roughly 10%. To conclude, with oil prices only going higher, a slowdown in U.S. production and exports should not be expected as long as prices continue to rise. The majority of the oil majors are committed to increasing production and if they can get the returns while doing it……why not drill?