Dr Ajay Kumar
(Chairman of Fox Petroleum)
OIL FUTURES: at the appointed time prices rally on additional output cuts: Saudi makes the credit to Oil market. Saudi Arabia gave light to Oil Market. Saudi Arabia, played well energy geopolitics, and the big production cut made him centre of Oil Market. Saudi Arabia took a foremost risk in launching the oil price war. Saves almost sentiments in Oil market, where, It cost the global energy market almost two months of spectacularly low oil prices but, with the largest deal to cut production in history, Saudi Arabia has won the oil price war. The new Captain of Oil Market.
OPEC and Saudi Arabia agreed to cut down production. This arrangement has significant sentimental boost on Oil Market. Crude prices are on the brink to gain further support thanks to Saudi Arabia’s announcement of an additional cut of 1.0 million barrels per day of crude production. The move by Saudi Arabia is aimed to provide additional thrust to oil prices in a time when product demand and refinery utilization is improving, thanks to the beginning of the relaxation of shelter-at-home orders in several countries.
Despite that Saudi Arabia’s production will be 7.5 MMBPD for June, according to this latest announced voluntary cut. The announcement arrived today as a part of a wider message from the Kingdom, related to austerity measures and strategies to balance its finances, and is an attempt to attract collaboration of other OPEC countries for additional voluntary cuts. According to statements from the Energy Ministry, the hope is that additional producers can see the benefit of cutting oil production, as a ways to support market prices. (Note that shortly after the announcement by Saudi Arabia — Kuwait announced an additional cut of 80,000 b/d and UAE announced an additional cut of 100,000 b/d.)
It is not American Strategy. It is the big vision coming from Saudi Arabia. It is clear that the Saudi strategy has shifted, from seeking to gain market share to targeting support for world benchmark prices. If the Saudis had continued to place additional barrels to the Americas or Europe, as they were during March-April, they would had needed to announce deep discounts vs. WTI or Brent for the month of June, and this would had spiraled into additional weakness in spot prices. So, the alternative was to trim production.
That we can see from Asian market, The Singapore Marine Fuel 0.5%S front-end June/July contango narrowed to a seven-week high on Monday amid tightening supply, showed S&P Global Platts data, reversing a downward trend that lasted for a few months. US crude supply is expected to extend its run higher next week from last week, but builds were likely tempered by upward trending refinery demand and steady exports. Trend is upward now.
But the oil market is not completely out of the woods just yet. Even with this additional cut it is difficult to see crude prices stay above $30/bbl on a permanent basis. For this to happen the market will need to witness additional evidence of lowering inventories and increased demand in the US, and other key markets in Europe and Asia. Given the different pace at which each economies are returning to partial normalcy, the results will take time to be seen.
WTI contract term about to be over. Also, it is important to note that the WTI futures contract for June will expire on May 19th, just a few days ahead. At this moment the market could see again a momentary anomaly, maybe not as chaotic as the one from April 20th, but a hectic one nevertheless. When holders of WTI futures contracts did not anticipate with enough time how to complete the rollover to June contracts, or how to work out the physical delivery, the price of front month futures contract fell into negative territory. It will be a good opportunity to see if participants in the futures market will be caught again with difficulty to sell their front month contracts, or if the rollover to the next month is smoother.
Conclusion: Saudi Arabia has told its national oil company Aramco to slash its crude oil production for June by an extra one million barrels per day (bpd). What if Russia & America follow the rules? It will help Oil market to breath to senses. But, it will impact on Indian oil market where, it has 69% tax on retail oil price. Post lock-down, and increase in oil price will not be easy to stop inflation. Anyways, Oil market is in positive direction, very good for Trillion Dollars of Investment.