Saudi and Russia Change Their Tune

Saudi Arabia and Russia have reportedly agreed among themselves to end the OPEC production quotas at the upcoming June meeting. This has deflated the overheated bull-case, but it has not changed the supply-and-demand situation in the global oil market. Ending the quotas can make up for Iranian and/or Venezuelan exports lost to sanctions – giving Saudi and Russia a chance to muscle in on troubled competitors’ business, and for Saudi to thank Trump for pulling out of the Iran nuclear deal. But depending on the impact of sanctions, that could take everything Saudi and Russia have got as swing producers. Global inventories are probably not fully back to OPEC’s target, but their getting there, so it is time to announce a phase-out of quotas and it won’t change the supply-and-demand dynamics. US export bottlenecks continue to point to shortages of light crude in the emerging markets, and a domestic glut. We do not change our expected range for $65 to $75.