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July 12, 2018

Saudi Arabia June Output Hike Misunderstood?

Saudi Arabia June Output Hike Misunderstood?

 

“Embarrassed” oil market due to Saudi Arabia June output hike. But why?

 

Crude oil output from OPEC in the past months increased by 173 thousand b/d. Saudi Arabia added the most in joint cartel’s production.

Saudi Arabia June output hike averaged 405 thousand barrels a day. This was quite unexpected information for the market and prices posted biggest intraday decline for several months (-4% for Brent on July 11). This was truly a market crash. However, I don’t understand why it caused so heavy sell-off. The total production of crude oil from the cartel increased by only 173 thousand b/d. The reason is supply outages in Libya, as a lasting civil war split oil industry between two hostile parties (West and East) which can’t agree on joint crude oil exports. Oil supplies from the country dropped by another 254,000 b/d in June. 

Thus, the average daily production of black gold by OPEC countries was 32.3 million barrels per day in June. The cartel lifted production caps on the last meeting but still produces below the quotes set on the meeting in December 2016. Without taking into account Libya and Nigeria, OPEC had to produce 29.8 million barrels a day. By the end of June, the total production was below the target by 300,000 barrels a day.

Such a low pace of output is caused by declining production in Venezuela and Angola. These two states produce 632 and 242 thousand barrels per day less than their capacities within quota. 

And it turns out that production increase in Saudi Arabia June output hike still does not cover the deficit of oil caused by various supply interruptions. 

According to OPEC projections, the world demand for black gold will be 99.4 million barrels per day in the third quarter of 2018 and 100.3 million b/d in the Q4. That is, if the cartel output stays the same, then the market will suffer from persistent deficit of 1.1 and 1.4 million b/d.

 

OIl market world balance

Balance of the oil market (million b/d). Source: EIA

 

Source: OPEC (Q3 and Q4 2018, subject to unchanged oil production by OPEC countries)

Also, recall that the production in the US stagnates for the fourth consecutive week. Thus, only OPEC +, namely Saudi Arabia and Russia, can significantly add to the world output.

If global production remains at the same level as in the second quarter of 2018, Russia and Saudi Arabia for two will have increase production by 1.7 million barrels per day to bring market back to equilibrium.

It turns out that production growth in Saudi Arabia is not completely terrible for the market, unless, of course, the demand for oil sharply falls.

 

USDRUB speculators have lost faith in the dollar?

 

After the April take-off of the dollar against the ruble, traders unwound wagers on further weakening of the Russian currency.

For the last two years, ruble traders have been mostly bullish on USDRUB.  From July 2016 to April 2018, the volume of open long positions for the greenback at times exceeded the sum of short positions. The April jump in exchange rate led to profit taking/stop-loss covering on the part of retail traders. 

 

MoEX net position

Position of retail traders on USDRUB futures

 

For almost three consecutive months, the spread between the “long” and “short” for the dollar has been stying in a rather narrow range. Monday the volume of short sales exceeded the volume of long positions for the first time since May 2016.

Thus, an appeal of the game against the ruble dried up even among speculators.

The quit of retail speculators  from the bulls camp points on the stabilizing exchange rate. USDRUB speculations have become unprofitable because of lack of a pronounced trend and subdued volatility.

Participation of traders occurred at the time of strong fluctuations in the foreign exchange market. It took almost two years for speculators to stop believing in the rally of USDRUB. Most of the time the Russian currency strengthened against its counterpart from US during this period.  That is, market participants were losing their money.

For this reason, in our opinion. it is always better to concentrate on those assets which value can be calculated – stocks and bonds. At the same time, it is worthwhile to diversify its portfolios with both ruble and foreign currency assets.

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