After crashing by a dramatic 8% on Friday, and tumbling to one year lows, crude is attempting a feeble rebound this morning on hopes the OPEC meeting next week will result in new production curbs by OPEC+. However, trader optimism has been dented by overnight news that Saudi Arabia raised oil production to an all-time high in November, boosting its output well beyond the quota that had been agreed upon in the Vienna 2016 OPEC summit, and prompting fresh doubts if Riyadh is sincere about cutting output.
Reuters cited an industry source, who said Saudi crude oil production hit 11.1-11.3 million barrels per day (bpd) in November, an all time high. That levels is up around 0.5 million bpd - equal to 0.5% of global demand - from October and more than 1 million bpd higher than in early 2018, when Riyadh was curtailing production together with other OPEC members.
Saudi Arabia agreed to raise supply steeply in June, in response to calls from consumers, including the United States and India, to help cool oil prices and address a supply shortage after Washington imposed sanctions on Iran. However, the move backfired on Riyadh after Washington imposed softer than expected sanctions on Tehran. That promptly triggered worries of a supply glut and Brent collapsed to below $60 per barrel on Friday from as high as $85 per barrel in October.
Russia, which teamed up with Saudi Arabia in the first OPEC joint production cuts since 2016, also raised production steeply in recent months to a post-Soviet high of 11.4 million bpd, as the world suddenly found itself awash in excess oil, and leading to a spike in oil inventories.
Ironically, Saudi oil industry sources have signaled they wanted prices to stay above $70 per barrel and Saudi energy minister Khalid al Falih said this month global oil supply could exceed demand by over 1 million bpd next year, requiring OPEC to take action. Yet as so often happens, it was Saudi Arabia - OPEC's swing producer - that was instrumental for much of the excess production that has sent oil prices tumbling.
And while Falih said earlier this month that state oil giant Saudi Aramco would ship 0.5 million bpd less crude in December than in November as demand from customers was lower, he now faces a formidable adversary to any stated production cut: US president Trump.
As a reminder, Trump has stood behind Saudi Crown Prince Mohammed bin Salman despite calls from many U.S. politicians to impose stiff sanctions on Riyadh following the crisis around the killing of journalist Jamal Khashoggi at Riyadh’s consulate in Istanbul last month. Needless to say, Trump's kind words do not come without a price, and that is for Saudi Arabia to keep pumping oil, resulting in lower prices.
On Sunday, Trump thanked himself for lower oil prices and compared it to a big tax cut for the U.S. economy. "So great that oil prices are falling (thank you President T),” Trump tweeted, referring to himself. Last week, Trump tweeted: “Oil prices are getting lower... Thank you Saudi Arabia but let’s go lower”.
Meanwhile, also overnight, Goldman Sachs Group - which has been urging its client to keep buying oil all the way down from its recent highs and well into the current bear market - remains undaunted by the sell-off in raw materials and is forecasting returns of about 17 percent in the coming months, describing the current situation as unsustainable and touting this week’s G-20 meeting in Buenos Aires as a potential turning point; specifically the bank expects an OPEC supply cut and its announcement will lead to a recovery in prices. It advises going long on short-dated Brent.
“Given the size of dislocations in commodity pricing relative to fundamentals -- with oil now having joined metals in pricing below cost support -- we believe commodities offer an extremely attractive entry point for longs in oil, gold and base,” Goldman's chief commodity strategist Jeffrey Currie said in a report. The note listed its top 10 trade ideas for 2019, including a rebound in Brent as OPEC cuts supply.
“Many of the political uncertainties weighing on commodity markets have a significant chance of being addressed in Buenos Aires. This includes some improvement on the China-U.S. relationship and, like in the 2016 G-20 meetings, some greater clarity on a potential OPEC cut.”
Amusingly, Goldman also is clutching to its "negative gamma" thesis which while maybe explaining the first rout in oil two weeks ago, fails to capture the subsequent two 7%+ drops:
Exacerbating the situation was a negative gamma event as we discussed two weeks ago. At $50/bbl WTI, however, we are now on the other side of the largest number of puts struck at $55/bbl (see Exhibit 7) which creates the need for swap dealers who are delta hedging the producer puts to begin to buy again. This is why we feel the time is right to start recommending a long position in oil at these levels.
In recent years, the performance of Goldman's "Top trade" recommendations has been mixed at best, although with oil plunging to record oversold territory, it is likely due for at least a modest rebound.