If you showed an arc to a good mathematician, said
Emerson in one of his famous essays, the former would complete the circle.
This is exactly what we saw in the oil markets this
week: smart investors looked at the dots in the charts that really matter and
completed the picture on their minds that most analysts, traders and investors
do not see.
In short, they exercised caution in exact response
to what they see, as going with the flow was never in their character.
As a consequence, oil price that showed a remarkable
recovery during the second phase of the pandemic lost its momentum this week,
much to analysts’ surprise.
On one hand, the measures taken by the Western
governments to keep the pandemic at bay do not seem to be doing the trick; the
leaders, having listened to endless experts, are really in a quandary without
knowing how to move forward; the progress made on the vaccine front so far is
doing very little to shore up the loss of enthusiasm in it by the public,
something often blamed on misinformation.
On the other hand, the risk of oversupply is growing
by the day: there seem to be plenty of political manoeuvres to ease the
sanctions against Venezuela on humanitarian grounds; Iranians show optimism by
increasing the production of oil, sensing the easing of sanctions; Libya is increasing
its production too, hoping that the political upheavals will be sorted out in
the near future.
In these circumstances, the production cuts, made by
the OPEC+ under pressure from its more powerful members, do not seem to be a
productive move in the long run, although it must have favoured the block in the
short run.
In addition to the production cuts, agreed upon at
the recent OPEC+ summit, Saudis went even further on their own by cutting down
the output by 1 million barrels per day.
In the presence of such a move, certain members such
as the UAE, were forced to warn shale producers not to flood the market with
excess oil, which is highly unlikely to happen; the suffering of the shale oil
producers predates the pandemic, when oil price dropped significantly.
Saudi Arabia was instrumental in that development
too, as it did not cut down the output, hoping that the shale producers would
struggle to survive when the oil price remained low due to oversupply.
Although, it did the trick in the short-run, shale
oil producers sharpened up their ingenuity in order to minimize the production
costs while cushioning the impact. In short, the shale oil producers had
bruises, but did not bleed to extinction.
Facing the prospect of dealing with a huge budget
deficit, Saudi move to cut the crude oil output is understandable.
Elevating the same strategy to a place a few notches
above on their ambition index, in the current circumstances, however, is
neither productive nor sustainable – especially when a new team is in the White
House with a revolutionary agenda.
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