Commentary by Jonathan Berkowitz, Laffer Tengler Investments Securities Analyst

Last week at the Robin Hood Investor Conference, Saudi Arabia’s energy minister, Prince Abdulaziz bin Salaman, stated that a supercycle in global oil prices could be triggered by a lack of new investments in exploration. He continued by saying, “I think it’s my job, and others’ jobs, to make sure this supercycle doesn’t happen”. Not so fast…

Shale producers in the Permian Basin are holding back. This is a turnaround from the early days of the shale revolution a decade ago, when new horizontal drilling and hydraulic fracturing techniques unlocked vast oceans of crude from rock previously considered impermeable. Unfortunately, the industry became a victim of its own success, pumping too much oil into the market causing prices to crash, but times are changing. Overall, the United States is pumping about 1.9 million fewer barrels a day since Covid-19 caused prices to tumble last year.

Oil came under pressure on Thursday according to some after the Federal Reserve signaled Wednesday its ultra-easy monetary policy may eventually come to an end. The market is assuming that when the Fed acts, economic slowdown is inevitable, but it’s a long way from here to there. Ultimately, whatever the Fed said or says will not change supply-demand fundamentals and it is not going to change OPEC+ policy.

For now, it looks as though the market is going to need extra supply in the second half of the year. The OPEC+ group is yet to confirm plans for production beyond July, while U.S. shale producers continue to preach discipline as they are making money again. All the more reason then, that the focus is so intense on when the market will see Iranian supply return as talks with the U.S. continue.

On June 19th, Iran announced that negotiations to revive a nuclear deal that would lift US sanctions on the oil-rich Islamic Republic in exchange for its scaling back its atomic activities have failed. Diplomats adjourned their sixth round of meetings with significant gaps remaining to mend the six-year-old accord.

So, if Prince Abdulaziz bin Salaman believes his job is to prevent a supercycle, the time is now. His actions in July will give us a better understanding. Will these high prices cloud his judgment, or will he put his oil where his mouth is?

10-Yr US Treasury Yld1.4785-7.66%61.90%
30-Yr US Treasury Yld2.0798-9.56%26.44%
Dollar Spot Index (DXY)91.8922.28%2.17%
Crude Oil WTI$73.4511.20%51.38%
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