The two predominant issues impacting the oil market right now appear to be the state of U.S.-China trade negotiations and U.S. oil stockpiles. However, traders should not lose sight of Saudi Arabia’s oil production and export plans for May and June, because these will impact the supply and demand balance much more significantly in the coming weeks and months.
On Sunday night and Monday morning, oil prices fell when it appeared that trade talks between China and the U.S. would break down, which in turn re-ignited fears that an ongoing trade war will lead to a recession and demand for oil will fall as a result.
This kind of movement in the market is really the result of traders acting based on their perception of how other traders and computer algorithms will react. It is not an actual reaction to a potential economic downturn, because that downturn is not on the immediate horizon, even if it does eventually materialize. After a brief recovery on Monday, prices fell again on Tuesday as similar fears dominated the marker. Just two days later, on Wednesday morning, oil prices rose as the outlook on a U.S.-China trade deal seemed more positive.
Weekly EIA data on U.S. stocks has also had an impact on prices over the past few weeks. Last week, EIA figures showed a large build in oil stocks, and prices dropped. This week, they showed an unexpected draw, and oil prices rose a little.
However, when looking at global supply, these factors should be overshadowed by news coming from Saudi Arabia and Aramco. The primary question is whether Saudi Arabia will increase its production and exports to replace Iranian oil that will come off the market due to tightening U.S. sanctions. U.S. President Donald Trump and the State Department have said that Saudi Arabia will put more oil on the market, but the Middle-Eastern country has repeatedly said that it will only act to increase production in response to customer demand.
Now that orders are coming in for oil shipments for June, we are getting a better picture of how this is shaping up. According to Energy Intelligence, Saudi Arabia plans to produce between 10 and 10.3 million bpd in May. The increase, however, is mainly due to higher domestic demand for oil and gas in the kingdom as temperatures rise and electricity demand grows, especially during this month of Ramadan.
Saudi Arabia does not plan to increase its exports much above its April numbers of 7 million bpd. An official stated that the country has received requests for oil from customers who were previously importing Iranian oil for the month of June and that all of these requests will be met while maintaining the kingdom's 10.3 million bpd production quota. In fact, Saudi Arabia intends to keep its exports to just under 7 million bpd in June, a relatively low number. Aramco also raised the prices on its oil sold to Asian customers for June lifting. These are all indications that we should expect oil supplies to tighten in May and June.
Saudi Arabia has been clear that it is only willing to supply more oil to Iran’s former customers if they are willing to pay more. These customers have been buying Iranian oil at cheaper prices and have also received discounts on shipping and insurance costs. Unless customers are willing to defy U.S. sanctions on Iranian oil, Saudi oil prices will rise. Traders should expect to see that reflected in the market.
This doesn’t touch on other factors hitting oil supply, like Venezuelan’s deteriorating production, unstable output in Libya and Russia’s recent oil contamination episode. To conclude, even though oil market news is dominated by hazy updates on U.S.-China trade relations and by the weekly ups and downs of U.S. inventories, traders should beware of a potential supply crunch, especially in Asia.