Commodities
Inside OPEC+, Saudi ‘lollipop’ oil cut was a surprise too
Saudi Arabia kept under wraps its plan to make a deep cut to its own oil output during a weekend of OPEC+ talks in Vienna, several OPEC+ sources told Reuters, with some member states only learning about the reduction from the final news conference.
Saudi Arabia is the top OPEC producer and the member with the most flexibility to raise or cut output, giving the kingdom unrivalled influence over the oil market – although the impact on oil prices since announcing its plans has been modest so far.
The Saudi Energy Minister Prince Abdulaziz bin Salman has previously used the power of surprise in managing oil markets, where prices have come under pressure due to concerns about the weakness of the global economy and its impact on demand.
Days before the OPEC+ meeting, Prince Abdulaziz said he would inflict more pain on short sellers – those who bet that oil prices will fall – and told them to watch out. He announced the output cut after the meeting, calling it a “Saudi lollipop”.
Four OPEC+ sources, who were among their countries’ delegations involved in policy talks, said they only heard details of the Saudi cut at the Sunday evening news conference – and that the idea of a cut didn’t come up during a weekend of discussions on a broader deal to limit supply into 2024.
“No information on the additional cut was shared prior to the press conference,” one of the four sources said. “It was a surprise one, once again.”
Saudi Arabia said it would cut output in July by 10% or 1 million barrels per day (bpd) to 9 million bpd and may extend cuts further if needed. Meanwhile, OPEC+ agreed to extend cuts into 2024 but didn’t commit to any fresh cuts in 2023.
OPEC+, which groups the Organization of the Petroleum Exporting Countries and allies led by Russia, pumps around 40% of the world’s crude.
As well as the Saudi cut, OPEC+ lowered its collective production target for 2024 and the nine participating countries extended the April voluntary cuts to the end of 2024.
The United Arab Emirates secured a higher output quota that it had long been seeking – an issue that has caused tension between the group and Abu Dhabi, which has been increasing its output capacity.
The Saudi Energy Ministry and OPEC’s Vienna headquarters did not respond to requests for comment.
‘CAN’T PUSH THE OTHERS’
In the days leading up to the June 4 meeting, two other OPEC+ sources said there was an idea for more cuts by OPEC+ states, although this did not proceed to advanced discussions in Vienna.
Saudi Arabia, other OPEC+ sources said, recognised it would be difficult to secure cuts from others such as the UAE and Russia, which according to sources in the days before the meeting was reluctant to cut output further.
“The Saudis were cognizant this time they could not push the others,” an OPEC+ source said. “The UAE are happy with the new quota and it is a big relief for the Saudis.”
Still, Saudi Arabia did manage to persuade other members of OPEC+ that have been unable to produce at required levels due to lack of investment in capacity – notably Nigeria and Angola – to accept lower production targets for 2024 after long meetings.
Prince Abdulaziz told Al Arabiya after the meeting the group was tired of giving quotas to countries that were unable to produce them and that Russia needed to be transparent about its output and exports levels.
OPEC+ sources said the new targets for Angola and Nigeria were still higher than the countries can realistically pump, which means they do not have to perform real cuts.
Russia, whose exports have stayed strong despite Western sanctions, also avoided having to make a further reduction.
It is unclear if Saudi Arabia hinted about its possible voluntary cut to some officials in Russia or the African producers to help persuade them to agree a broader deal.
Nonetheless, all those producers stand to benefit if they can keep output the same or pump a bit more, especially if the Saudi cut boosts prices.
The Saudi cut could also give the kingdom more leverage in coming months to pressure countries that are not cutting output and yet benefit from others’ cuts, one OPEC+ source said.
“To avoid free rider behaviour, Saudi Arabia could threaten to put 1 million bpd back on the market within 30 days, which would lead to a drop in prices,” another OPEC+ source said. He did not name which countries this might be directed at.
So far, oil prices have risen slightly following the Saudi plan. Brent crude is trading higher than $77 on Thursday, up from Friday’s close just above $76.
“Saudi cuts are playing second fiddle to worries about the state of the global economy,” said Stephen Brennock of oil broker PVM, although he added the Saudi cut could widen a supply deficit in July.
“Accordingly, it will take a brave man to bet against an eventual uptick in prices.”
Investing.com – With another day of gains in and futures, the Swiss group Julius Baer has decided to change its outlook on commodities to constructive. The group now believes that both metals have the potential for further increases, as stated in a note sent to clients and the market on Friday morning.
The group mentioned that, in addition to U.S. monetary policy, the gold market is still dominated by Asia. “We have to recognize that the region’s willingness to pay for gold as a hedge against economic and geopolitical risks appears even greater than we expected,” said Carsten Menke, head of next-generation research at Julius Baer.
Weaker-than-expected U.S. economic data have revived hopes for interest rate cuts by the Federal Reserve (Fed, the U.S. central bank), boosting gold and silver prices. This could “be the missing incentive for safe-haven seekers in the Western world to return to the markets,” he added.
Central Bank Purchases in Focus
Central banks have been buying gold more for geopolitical reasons than economic ones, according to Julius Baer. In China, for example, there is a desire to reduce dependence on the U.S. dollar – important for avoiding potential sanctions.
The People’s Bank of China is believed to be responsible for at least 30% to 50% of all central bank purchases over the past two years. Although it shows signs of being price-sensitive, “its willingness to pay has increased as gold prices rise,” notes Julius Baer. It is expected that other monetary authorities will follow the same steps, moving away from the U.S. dollar.
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Over the past three weeks, US prices have surged 30% to above $2.50 per million British thermal units (mm/BTU), fueled by production declines and increased feedgas demand for liquified natural gas (LNG) exports.
Moreover, recent producer cuts, maintenance events, and Freeport LNG’s normalization of gas demand post-outage have contributed to this rise. Cheniere’s announcement of no heavy maintenance for its liquefaction trains this year also supports higher prices.
In a Thursday note, Goldman Sachs strategists said the return of gas prices above $2/mmBtu aligns with their expectations, as production curtailments “would ultimately lead to lower storage congestion risks for this summer.”
“That said, we see only limited further upside from current levels, with stronger gas prices risking a return of congestion concerns,” they added.
Goldman notes that prices above $2/mmBtu reduce gas competitiveness compared to coal, with a $0.50/mmBtu increase potentially cutting gas demand by 1 billion cubic feet per day (Bcf/d), especially in shoulder months.
Moreover, higher prices may prompt the restart of previously shut-in wells. EQT (ST:), the largest producer in the Appalachia region, indicated it would resume production if prices sustainably exceed $1.50/mmBtu. And while Appalachia prices haven’t risen as much as NYMEX, the local hub has averaged $1.44/mmBtu month-to-date, up 10¢ from last month, strategists highlighted.
Elsewhere, European gas prices have also risen this summer, though less sharply than in the US.
Title Transfer Facility (TTF) prices increased 18% over the past three months to around 30 euros per megawatt-hour (MWh), holding steady in May.
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However, unlike the US market, this rally lacks fundamental support, with Northwest (NW) European gas storage at record-high levels, Goldman strategists pointed out.
“To be sure, NW European LNG imports have remained weak relative to last year – and are likely to get weaker in the coming weeks owing to a seasonal decline in global LNG production, exacerbated by outages at Australia’s Gorgon export project,” they said.
“Going forward, we expect healthy non-European demand for LNG to continue to incentivize a decline in European LNG imports vs last year,” they continued.
Investing.com– Gold prices fell slightly on Friday, trimming some of their gains for the week as comments from a slew of Federal Reserve officials offered a more sobering outlook on interest rate cuts.
The yellow metal had risen to nearly $2,400 an ounce this week in the immediate aftermath of some soft U.S. economic readings. But it pulled back from these levels on Thursday and Friday.
steadied at $2,377.40 an ounce, while expiring in June fell slightly to $2,381.10 an ounce by 00:19 ET (04:19 GMT).
Gold retreats as Fed officials downplay rate cuts, but weekly gains due
The yellow metal fell on Thursday after a string of Fed officials cautioned against bets on immediate reductions in interest rates.
Several members of the central bank’s rate setting committee said the central bank will need much more convincing that inflation was coming down beyond a marginally soft inflation reading for April.
This saw traders begin pricing out some expectations for a rate cut in September. The and also rebounded from earlier losses this week.
Still, some softer-than-expected readings put gold on course for a 0.7% weekly gain.
The yellow metal was also in sight of a record high of above $2,430 an ounce, although it appeared unlikely the level would be met in the near-term.
Other precious metals retreated on Friday, but were set for bumper weekly gains. fell 0.2% but were trading up 6.2% for the week, while fell 0.4% but were up 4.5% this week.
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Copper mixed amid middling China cues
Among industrial metals, one-month copper futures tumbled from two-year highs tracking middling economic data. But three-month copper futures pushed higher and were set for a stellar week as markets bet on tighter supplies and an eventual demand recovery in the coming months.
on the London Metal Exchange rose 0.6% to $10,445.0 a ton, while rose 0.3% to $4.8935 a pound.
Data from China on Friday painted a mixed picture of the economy. While grew more than expected, growth slowed and shrank at an accelerated pace. Growth in Chinese also slowed.
The readings presented a muddled outlook for the world’s biggest copper importer, as it rolled out more stimulus measures to shore up growth.
Three-month copper futures gained on the prospect of a demand recovery, and were up nearly 4% this week. They were also at two-year highs.
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