The Gloves Are Off

The gloves are coming off and its every oil producer for themselves. Oil prices got slammed as Saudi Arabia oil minister Khalid Al – Falih suggested that not only will  Saudi Arabia step up to “meet any demand that materializes to ensure customers are satisfied” but all other producers should be doing the same. So, in other words, for the first time since the historic OPEC-Non-OPEC agreement went into effect in January of 2017, the Saudi oil minister is saying that there is no OPEC oil quota.

While the market took that as a very bearish sign, the reality is that now we are going to find out just how much oil the world can produce and whether it is going to be enough to meet demand. All the barrels will be on the table and we will see if the emperor has any clothes, or maybe, in this case, the Crown Prince. The reason why the Saudis are being so accommodative is that they are feeling the heat on the murder of Saudi Journalist  Jamal Khashoggi, which  President Donald Trump said was “the worst cover-up ever.”  The Saudis are desperate to keep President Trump on their side as it hopes that the U.S. will not cancel the sale of arms to the country and to put off more damaging sanctions. President Trump is using this to pressure the Saudis into paying up more for their defense. He wants more money out of the Saudis. While Present Trump basically washed his hands of the whole Saudi mess, putting the Saudi’s fate in Congress’ hands, the Saudi’s know that if President Trump can use his influence to get some of the members of Congress to go easy on them. Of course, the President will make them pay. He will make them all pay.

Yet, if the Saudis raise production and other producers follow suit, we will be erasing all the world’s spare oil production capacity. So, we are going to find out how the global oil market is going to react to events with no oil in the bullpen. The break-in oil prices should raise oil demand. Demand growth has slowed as higher prices moderated growth. Yet, now that problem is solved. Now we will get a demand surge if the world does not fall into a recession. Think of the price break as a new shot of economic stimulus. That stimulus, of course, could reverse the fortunes of some economies that have struggled with weakening currencies and rising prices. Yet, what happens if there is an event that takes oil off the market, perhaps an event in Libya, Nigeria, or any other country. Buckle up for an oil price spike.