Today at around 4:35 AM ET, WTI crude oil prices have fallen 0.5%. Today and tomorrow, OPEC+ members will discuss the fate of the production cut agreement. A CNBC report highlighted that OPEC+ is looking for a deeper cut. If OPEC+ decides on a deeper cut, a Santa Claus rally for oil might be in the cards.
Aramco driving oil prices?
Various media reports suggested that Saudi Arabia wanted a deeper cut, which might be related to Aramco’s IPO. After Aramco is listed, Saudi Arabia could look for an FPO (follow-on public offering) and listing at other exchanges.
Although Saudi Arabia hasn’t announced such plans, another stake sale will help reduce its debt and invest in other economic sectors. Alternative energy growth due to climate issues could impact oil prices and Aramco’s valuation.
Climates issues and oil prices
At the Climate Change Conference on Monday, UN Secretary-General Antonio Guterres said, “We simply have to stop digging and drilling.” He was referring to mining and oil and gas exploration activities. He also said that “the point of no-return is no longer over the horizon.”
In an interview with Yahoo! Finance last month, Credit Suisse’s Marisa Drew said that investing in businesses that are ignoring climate change issues might “go to zero quickly.” She also highlighted the risk of investing in the energy sector.
These factors could be behind Saudi Arabia’s stake sale in Aramco. Higher oil prices are necessary for a better return on Aramco’s stake sale.
Is OPEC+ geared up to counter shale oil?
In late 2016, OPEC members, led by Saudi Arabia, decided to cut their output for the first time since 2008. Between 2015 and 2016, oil glut dragged oil prices to an 11-year low. Later, a few non-OPEC oil producers formed an alliance known as “OPEC+.”
OPEC+ members’ supply cuts have limited the downside in oil prices. In a few instances, WTI crude oil active futures have moved above the $70 level. Rising non-OPEC supplies have diminished the chances of any upside in oil prices.
US oil producers have largely contributed to rising non-OPEC supplies. However, lower oil prices since 2015 have impacted US upstream companies’ financials. Read Will OPEC+’s Latest Strategy Lift Oil Prices? to learn more.
US upstream companies’ focus to increase shareholder returns also decelerated the US oil production growth rate. Read Oil Prices: A Look at China and OPEC’s Impact to learn about the slowdown in US oil production.
EIA inventory data
On Wednesday, the EIA reported a fall of 4.85 MMbbls (million barrels) in crude oil inventories. The fall was 3.12 MMbbls higher than a Reuters poll’s suggested decline of 1.7 MMbbls. On Wednesday, WTI crude oil futures rose 4.2%. The United States Oil Fund LP (USO) also rose 3.7%.
However, with the larger-than-expected decline, the difference between crude oil inventories and their average was unchanged at 3%. Between November 1 and November 29, the difference was at 3%. Usually, any fall in the figure is a positive development for active crude oil futures. Read How the Inventories Spread Is Affecting Crude Oil to learn more.
The inventory report showed a buildup of 3.85 MMbbls in gasoline inventories. A Reuters poll suggested a rise of 1.82 MMbbls in gasoline inventories. A rise in gasoline inventories that’s higher than the market’s expectations could signal a slowdown in the demand.
To learn more, read 2019 Oil and Gas Bankruptcies Paint Bleak Outlook.