GLOBAL INVESTING: Want to buy WTI futures at $48 a barrel?

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GLOBAL INVESTING: Want to buy WTI futures at $48 a barrel?
Saudi Oil Minister Khalid Al Falih has made no secret of his determination to restrict output and nudge prices higher.

Dubai - A look back at oil's shocking slide last week

By Matein Khalid

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Published: Sun 12 Mar 2017, 8:12 PM

Last updated: Mon 13 Mar 2017, 10:08 PM

Crude oil prices fell a shocking nine per cent last week after EIA data revealed US inventory as high as 528 million barrels. This is clear evidence that, despite 100 per cent compliance by Saudi Arabia and its GCC allies, last November's Opec output cut deal has not ended the global oil glut. It was also no coincidence that crude oil free-fall last Wednesday coincided with the Cera conference in Houston where the world's top oil traders and hedge fund gun-slingers huddle with Middle East, African and Russian oil ministers.
The ultimate kingdom (literally) of crude oil is Saudi Arabia. Khalid Al Falih, the new Saudi oil minister, has made no secret of his determination to restrict output, nudge prices higher, reduce the $70 billion budget deficit and ensure the success of the Aramco IPO on the New York, London and Riyadh stock exchanges. This is the reason Al Falih negotiated the Vienna output cut deal with Iraq, Iran and Nigeria, as well as the kingdom's allies in the GCC - Kuwait, the UAE and Qatar. Saudi Arabia engineered a 1.2 million barrel Opec output cut and then negotiated with Russia to obtain a 300,000 cut from the Kremlin. Saudi compliance since the Vienna deal has been more than 100 per cent, at least 60,000 barrels above its 486,000 quota cut. UAE, Kuwait and Qatari quota compliance has also been above 100 per cent. So why did oil prices fall five per cent in one day? The Saudi oil minister's comment that the Opec output agreement cannot be expected to be automatically rolled over in May if non-Opec compliance is so pathetic.
In reality, Al Falih was reminding the Russians that their promise in February did not materialise. He also reminded Iraq that Saudi Arabia will not cut its own output to make way for Baghdad's ambition to increase its production of Basra Light to five million barrels a day. In any case, Prime Minister Haider Abadi has criticised Iraq's commitment to cut output by 210,000 in Vienna at a time when the Iraqi Army is engaged in a horrific battle to retake West Mosul from terrorists. Kuwait has also criticised Iraqi intransigence in the Opec while its own output cut compliance is a stellar 140 per cent. The moment these spats among the world's top oil producers became public at the Houston conclave, the oil bears slammed the West Texas futures contract on the New York Merc.
Saudi Arabia has played a catastrophic global game of chicken with US shale oil producers ever since Ali Al Naimi abandoned the kingdom's "swing producer" policy at the November 2014 Opec ministerial meeting, the catalyst for the oil crash. Yet Al Falih rescued the badly-wounded US shale oil industry with his November 2016 pact in Vienna. The problem is US law precludes any tacit or formal collusion between Saudi Arabia and the US shale oil wildcatters. This means the world oil market will revert to its pre-John D. Rockefeller, pre-Seven Sisters, pre-PEC violent boom-bust cycle as global output fluctuates dramatically over time. After all, while the world's oil producers ship 95 million wet barrels in the holds of oil supertankers, the world's banks, hedge funds and speculative energy traders exchange 1.3 billion in "paper barrels" via oil futures, options and swaps on the New York, London, Olso and Dubai and Singapore energy exchanges. Speculators, not sovereign states or the Seven Sisters move oil prices in the new energy world order.
Saudi Arabia's warning has not gone unnoticed by the shale oil prince of the Pemian Basin. Harold Hamm, the billionaire CEO of Continental Resources, Texas's largest shale oil producer warned that the industry will have to grow output in a "measured way or else we kill the market".
The smoke signals from Houston, the New York Merc and the London IPE now tell me that crude oil is a buy at $48 on West Texas. Global growth will lead to higher oil demand even as current oil stockpiles peak. The world is now operating on minimal spare capacity, possibly as low as 1.5 MBD. Nigeria, Venezuela, Iran and Algeria simply cannot boost output without hundreds of billions in capex that Big Oil is simply not willing to invest. Demand is inelastic in the short run while large swaths of shale oil production becomes uneconomic below $50, as a rig count growth reverses. Saudi/GCC output cuts will be bigger than US shale oil growth. Time to buy West Texas futures at $48 for a $58 target in December!
The writer is a global equities strategist and fund manager.

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