Saudi spotlight

April 20, 2016 08:07 AM
Daily Energy Market Analysis

President Obama is landing in Saudi Arabia to try to smooth over sour relations with America’s long-term ally, Saudi Arabia. While the crude oil market is selling off overnight on renewed concerns about China’s economy and the ending of the Kuwaiti oil strike, this meeting today may have more of a long term impact on the future of oil prices then some of these short term factors.

Tension between Saudi Arabia and the United States is at its worst since, maybe, ever. Obama’s foreign policy and tensions over Saudi’s alleged role in the 9/11 terror attacks are creating a fissure in the Saudi-U.S. relationship that goes back to Franklin Delano Roosevelt in World War II. It is not helping that the Saudis are feeling the pain of low oil prices which forced them to go out and borrow $10 billion today.

Obama’s role in lifting sanctions on Iran and the backing away from the red line he drew in Syria has Saudi Arabia wondering if the Obama administration is friend or foe. As far as Saudi Arabia is concerned, Obama’s foreign policy has been a disaster for the Saudi Kingdom. By lifting sanctions on Iran it has allowed them to be a tougher foe in the proxy war they are fighting with Iran in Yemen. They are also still flummoxed by Obama’s about-face in Syria which led to millions of people losing their life and helped keep in power President Bashar Assad, an Iranian ally.

The Saudis are also fuming about a bill that would allow the relatives of 9/11 victims to sue the Saudis, which passed the Senate Judiciary Committee in January but has not been out before congress. The Saudis have threatened to take their economic ball and go home and sell $750 billion in U.S. assets if Congress passes the law. Not that Saudi Arabia has always been our best of friend, but in times of both Iraq wars the Saudis raised oil output to try to help shield the U.S. from an oil price spike. They did this even in the case of the second Iraq war when they did not agree with U.S. action.

The Saudis backing away from the Doha Intuitive may show their displeasure with Russia as well as the Russian oil minister Alexander Novak, who said he went to Doha under the idea that he was there to sign an oil production freeze deal and not to debate one. The Saudis backing away from the deal show they are in no mood to bargain and that may be a warning to Obama that this meeting with Saudi Arabia probably will not be all warm and fuzzy. Besides, the Saudi’s production war was designed to take out the U.S. shale oil producer and kill the U.S. energy industry. Maybe President Obama and the Saudis can find some common ground there.   

Major OPEC countries are showing the stress with rising oil prices. Cutbacks and privatization of the Kuwaiti oil industry caused oil and gas workers to go on strike. Now oil prices are taking some heat as the Kuwaiti oil workers return to work after a 4-day strike. Yet, behind the drama there are more signs that even the strongest in the OPEC cartel can’t take low prices for much longer. Even Saudi Arabia had to raise $12 billion dollars from a group of global banks as it had its first international debt issuance in 25 years. It was structured as a fixed five-year note joining other Gulf oil producers like Abu Dhabi, Qatar and Oman that have been forced to borrow from international bond markets.

What this says is that the oil war is going to take more causalities. Even the production freeze failure may cause more production destruction, enhancing the odds for a new super cycle for oil. At that time the U.S. may need Saudi Arabia to pump more oil to help us out, but perhaps next time they may not be so willing to help their old ally. In the short term oil traders are feeling better about the supply side as U.S. inventories rise and Kuwait ends its oil strike. It was reported that after the Kuwaiti government said they would not negotiate with the union until they ended the strike, the union decided to go back to work. The union said they would make every effort to immediately return production to its previous level.

The API also reported that U.S. crude inventories increased by 3.1 million barrels. Yet, they fell by 235,000 barrels in Cushing, Okla. The API also reported that gas supply fell by 1.0 million barrels and distillate inventories by 2.5 million barrels. The EIA is next up at 9.30a central time today. The market wil focus on U.S. oil output that should fall further this week after falling below 9.0 million barrels a day last week.  

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.