Oil Tug-of-War

Welcome to the latest edition of Oil Titans, a newsletter for people interested in the oil industry — written by me, Noha Mahmoud. Please send your feedback to [email protected] or via Twitter: @nouha_mahmoud

My choices this week

1. Oil steady near October highs as Saudi price hike and falling US stockpiles support market, but $75 resistance holds.
2. OPEC output slips in December as UAE leads deeper cuts, exports hit 18-month low.
3. Trump’s “Drill, baby, drill” Pledge: Can US oil plans disrupt Russia’s stronghold?
4. Goldman Sachs: Short-term price risks skewed higher as Iran faces renewed US pressure

Oil near highs

Oil held steady near October highs, supported by a Saudi price hike, with the kingdom betting on stronger demand from Asian customers while US stockpiles decline.

Futures were unable to breach the key psychological level of $75, which led West Texas Intermediate to pare gains and trade near $74 a barrel.

However, some traders view crude's recent increase as a short-term bounce.

Bloomberg says that Technical signals including the relative strength index show prices are at overbought levels, a reading that indicates a pullback may be imminent. Market optimism is being limited by expectations for a glut, the possible revival of idled OPEC+ production and lackluster demand from top importer China.

Crude prices are “overcorrecting” due to low inventory levels at the Cushing storage hub, and investors are “overestimating the effects and quickness of Iranian sanctions,” said Joe DeLaura, a former trader and global energy strategist with Rabobank. Markets need to remember that “any pop in prices from Iran or Venezuela sanctions will be met by OPEC bringing back supply.”

What is the key psychological level ?

It refers to real-time insight into a price point that is perceived as significant by investors and traders.

In this story, the $75 level for WTI crude is considered a significant psychological level because it has previously acted as powerful support that investors often pay attention to, as seen in October..

If the price is below this level, it might indicate bearish sentiment.

If the price is above it, it could signal potential for further gains.

UAE trims OPEC

OPEC Output Slips in December as UAE Leads Deeper Cuts, Exports Hit 18-Month Low

OPEC’s crude oil output dipped in December as the UAE implemented deeper cuts to support global oil markets.

According to a Bloomberg survey, the UAE reduced output by 100,000 barrels a day, bringing exports to an 18-month low. This brought OPEC’s total crude production down by 120,000 barrels a day, lowering output to 27.05 million barrels per day.

Similar-sized cutbacks in Iran and Kuwait offset modest gains in Libya and Nigeria.

Led by Saudi Arabia, OPEC and its allies have been withholding crude output for the past few years in an attempt to defend prices against fragile oil demand and plentiful American supplies. Last month, the coalition agreed once again to delay plans for reviving the halted production.

Trump's Oil Challenge

Happy New Year will start with President Donald Trump and his many plans, one of which is “Drill, baby, drill.”

An interesting POV from Sergey Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center, published in the FT, regarding this “gleeful pledge.”

He says Trump’s ambitious oil plans will not derail Russia. “It would still be very disruptive to try to embargo Russian oil from the world markets altogether.”

According to Vakulenko, this pledge aligns with the idea of weaponising America’s status as the world’s largest oil producer to strip Russia of the oil revenues funding its war in Ukraine.

If Trump starts implementing his plans, the US could flood the market with its crude, driving prices lower and pushing out expensive Russian barrels. Increased US production could make it possible to embargo and sanction Russian oil exports altogether without causing a shortage or sending prices sky-high.

However, the ambitious plans are unlikely to derail Russia due to the long timeline, Russia’s low production costs, limited replacement capacity from the US, and the global reliance on Russian oil.

Economic Viability of the US Plan:

• The proposed 3-3-3 plan to increase US oil production by three million barrels a day by 2028 faces skepticism due to high shale oil costs and limited impactful measures to reduce those costs (e.g., royalty cuts or red tape removal).
• The timeline for the plan’s success (2028) does not align with Trump’s promise to address the Ukraine war early in his presidency.

Russia’s Resilience in Oil Production:

• Russia’s cost structure is low ($11–$17 per barrel for production, processing, and development), allowing it to maintain production even if global oil prices fall below $50 per barrel.
• The weakening rouble further offsets production costs, keeping Russia competitive.
• Although Russia lacks new growth projects, it can sustain manageable declines (2–3 percent annually) while continuing exports.

Limited Impact of Additional US Supply:

• Even if the US achieves the additional three million barrels per day, it falls short of replacing Russia’s seven million barrels of exports.
• Embargoing Russian oil entirely is impractical given its significant role in global oil markets.

Russia’s Trade Balance:

• While lower oil prices would reduce Russia’s revenues, the impact on its trade balance and current account surplus is limited.

No Plausible Strategy from Trump:

• The West, despite sanctions, has only partially reduced Russia’s oil revenues.
• Trump’s plans lack a feasible short- to medium-term strategy to significantly disrupt Russia’s oil revenues.

Short-Term Price Surge

Goldman Sachs issued its January 3rd report on Iranian crude oil exports with an important statement: “We continue to think price risks are skewed higher in the short term.”

The report forecasted a modest decline in Iranian crude oil supply by Q2, with the incoming US President Donald Trump expected to implement policy changes and tighter sanctions.

“Declines would have to be a lot larger than our baseline to achieve a breakout of our $70-85/b Brent range, a scenario we currently view as unlikely. Nevertheless, we continue to think price risks are skewed higher in the short term.”

The research note said that Iranian oil production and exports have come back into focus ahead of inauguration day for the new US administration, which reportedly aims to renew the 'maximum pressure' campaign against Iran.

This dovetails with the intensification of pressure on Iran, which has included several additional sanctions targeting Tehran's shadow fleet and facilitating entities.

That is all for this dispatch from Oil Titans. Thanks for reading! You can send your feedback by email: [email protected]. If you enjoy this newsletter please do share it with others.