On Saturday President Donald Trump wrote on Twitter that in a phone call with King Salman Saudi Arabia had agreed to increase oil production “maybe up to 2,000,000 barrels” in response to turmoil in Iran and Venezuela. The Saudi government has acknowledged that the phone call took place but its statement didn’t mention any increase in production targets. “During the call, the two leaders stressed the need to make efforts to maintain the stability of oil markets and the growth of the global economy,” the Saudi statement said.
Today international benchmark Brent crude fell 2.40%. U. S. benchmark West Texas Intermediate was just about unchanged, down 0.28%.
The Trump administration needs to put together an agreement from Saudi Arabia and other producers before this fall in order to make its goal of getting U.S. allies to cut off all oil purchases from Iran by November 4 possible. The U.S. will reimpose sanctions on Iran and its oil industry by that date in response to a U.S. withdrawal from the 2015 Iran nuclear deal. The Trump administration has threatened allies such as South Korea and Italy with sanctions if they do not cut off imports from Iran. (South Korea accounted for 14% of Iran’s oil exports in 2017; Italy for 7%. China is by far the largest importer of Iranian oil at 24%.)
Oil industry analysts estimate that successful sanctions could remove about 1.5 million barrels a day of Iranian oil from global oil markets.
Besides the confusion about what, if anything, Saudi Arabia agreed to do to increase oil production–and remember that OPEC and producers such as Russia have already agreed to increase production by 700,000 to 1 million barrels a day–there’s disagreement among oil analysts about how much more oil Saudi Arabia could pump. Saudi Arabia currently produces about 10 million barrels of crude a day. It’s all-time production record is 10.72 million barrels a day. Industry analysts doubt that the country could produce more than 11 million barrels a day, and could only reach that target by running at full-out levels that would stress the country’s oil infrastructure.
I’d use any short-term weakness in Brent prices here to add to or establish trading positions to the long side in oil. The run up to the U.S. deadline of November 4 for ending purchases of Iranian oil is likely to be very chaotic. A high degree of uncertainty will push up oil prices over the next few months.