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Oil Markets Unbalanced By Brinkmanship



OPEC agreed in Vienna that it would roll over its 1.2 million. B / d crude oil production cutbacks for another nine months, which would hold the agreement until the end of March 2020. On Tuesday, the oil cartel discussed the cooperation between non-OPEC producers whose main member is Russia. Both the Saudi Energy Minister Khalid al-Falih and Russian President Vladimir Putin had already said at the G20 summit in Japan that they had agreed on the transition, so OPEC + cooperation was more or less a formality.

The cuts that OPEC + promised already in place and there is little reason to expect a general move. Saudi Arabia in May produced about 600,000 b / d under its cap. Venezuela remains mired in an economic crisis that has severely destroyed the operational capacity of the state oil company PDVSA. Iranian exports are strictly bound by US sanctions, and the Arabian Gulf War will follow Saudi Arabia's leadership.

Other OPEC members have a little extra production capacity. Iraq has produced about 300,000 b / d over the hat and remains the bad boy, but it is limited by domestic infrastructure boundaries for raw production and exports. Russia's short-term production has been slowed down by the clean-up operations related to crude oil pollution in the Druzhba oil pipeline.

Trade Negotiations

The possibility for OPEC to implement deeper cuts was largely rejected on the basis of a softening of the trade war between the United States and China. At the G20 summit, US President Donald Trump said planned new tariffs would not be imposed on China. Trade negotiations must be resumed. Trump even offered a concession on US sales to controversial Chinese tech giant Huawei.

The situation has returned to someone who looks like the beginning of the year, but with the crucial reservations that six months have been lost and there is no guarantee that resumed conversations will not collapse again as they did in May. Meanwhile, world economic prospects have become gloomy as the effects of the tariffs already in force are taking their way.

World economic growth is already slowing. The absence of multiple tariffs suspends an additional threat, it does not change the despondent travel directive.

Obstacles to compromise

An end to the commercial war requires both parties to cross lines drawn in sand. The US negotiating position represents a challenge for the entire Chinese economy's structure and the ambitious path of modernization set by Chinese President Xi Jinpeng.

Modernization in the Chinese context does not mean market leverage, but technological leadership. State aid to major industrial sectors ̵

1; from steel to solar panels, electric cars, IT and AI – as the US challenges, is an integral part of achieving this modernization.

The United States not only wants a significant movement from China, but also mechanisms to ensure compliance. If presented through a multilateral body such as the WTO, such mechanisms can be designed as international rules, ie. mutual cooperation, with independent control and arbitration.

However, concessions related to a bilateral Chinese-American standoff see as a front end to Chinese sovereignty. The American one-sided approach makes the discovery of a face-saving formula harder for both sides. The initial adoption of hardline positions and their subsequent robust defense means that compromise appears diplomatically more like a loss-less than a win-win.

Optimism on resumption of trade negotiations reflects the view that the political costs of damaged trade and slow economies will begin to outweigh the political gains of hard bargaining positions; The idea that reason will eventually rule.

Downside scenario for the oil market is twice: either it takes more time, perhaps another six months, to win or, alternatively, what was previously not the case, proclaimed negotiations again, talks again and both sides dig in for a long slaughter war.

US shale

The oil market has responded positively to OPEC's decision, as Brent pushes back in the middle of the 60s / bbl from a $ 60 / bbl flirting in early June. At this level, the US slate production will continue to grow.

Falih's comment that US oil production will peak and then plateau is questionable given the scale of the resource. The amount of ultimately recovered oil is a function of both price and technology. It may be misleading to see US slate as a conventional oil resource that follows a similar production path to the North Sea uniformly.

It is also a medium to long term view that has little relevance to oil prices over the next three several years. Although US slate is the highlight and plateau, it is not expected to do so until the mid-2020s, after which it can be supplemented by both Canadian and Argentine slate production, although the fortunes of the latter are greatly compromised by the upcoming Presidential election in Argentina.

Falih's view also does not take into account the possibility of highest oil consumption. The Chinese and US trade war is an existing dampening of the growth in demand for oil, the top oil demand is a more existential threat, but one that can become more apparent coterminous with a peak in US slate production. OPEC rollover is a short-term solution for today's market conditions rather than a long-term strategy.

Iran / USA

Trump is a man fighting for war on several fronts. Not only is he engaged in a trade war with China, but an even more tense stand-off with Iran. As OPEC spoke, Iran violated its commitment to low-level enrichment in the nuclear agreement reached with the P5 + 1 group of world powers from which the United States withdrew.

Here too, it seems that it is hardly anchored on both sides to demand humiliating surrender rather than compromising. Iran's breach of nuclear contract terms is unlikely to galvanize European or other opposition to the US position.

The effort in this dispute is higher than than the trade war because there is a real risk of conflict, which will have a serious impact on both crude oil and LNG flows from the Arabian Gulf. Recent attacks on tankers and Iran's shooting of an American drone in June were dangerous flashpoints.

Again, compromise is likely to occur through a multilateral or multilateral agency, but Trump does not seem to do multilateralism. There seems to be very little prospect of movement on both sides, and the view is thus for a longer period of increased golf tension, while the sanctions take their slow and uncertain effect.

The US-Iran standard will increase oil market volatility. OPEC's transfer stabilizes the supply side of the market at present, but is another gift for non-OPEC producers because it will be at the expense of market share. Russia's involvement in the transfer is uncertain, as it is masked by brief practical necessity. It can now be caught in the long term in cooperation with OPEC, but it can also in 2020 decide that it will have its free rider benefits back.


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