Saudi Mulls Response to Trump's Oil Action

In response to the US announcement to end Iranian oil waivers aimed at reducing Iran exports to zero, Saudi Arabia reportedly is ready to raise production. Oil is off by less about 50 cents from its 6-month highs (Brent high was $74.70 and US crude high reached $66.19). The DOW30 Premium trade was closed at 26580 for 300 pt gain. USD strength emerges across the board with the USD index at its highest since March 7th. US new home sales jumped 4.5% in Mar, suprising estimates for a 3% deccline. All commodities are in a slump with the exception of oil.

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Earlier in the week, the Washington Post reported that US Secretary of State Mike Pompeo will announce on Monday that countries importing Iranian oil will be told to stop or face US sanctions. A similar announcement was expected in September but the US balked and gave several countries waivers, allowing Iran to continue exporting 2 million barrels per day. That surprise was largely responsible for the collapse in crude in Q4.

If the report is correct, the US will announce that all Iran exports as of May 2 will be subject to sanctions. Certainly some will still slip through to non-US-friendly countries but much of the remaining 1.25 million barrels per day of current exports will be cut.

We're watching two things along with the headlines. 1) The WaPo report says Pompeo will simultaneously announce offsets to Iran exports from Saudi Arabia and the UAE. Neither has enough spare capacity to make up the shortfall but that could limit the headline risk. 2) How importers respond. India remains a heavy importer of Iranian crude and though they are unlikely to risk the wrath of US sanctions, they do have some leverage.

Saudi Arabic is careful to repeat last year's miscaculation when it hiked production to a record (exceeding 11 mln barrers per day) only to see Trump's backtracking off the sanctions lead to the intensification of oil's autumn plunge.

$72.68 for Brent is the 61.8% retracement of the Q4 plunge. A break (and close) above that line would be a bullish development that could target as high as the Oct 2018 high of $86.74.

At the same time, oil exporters such as CAD, NOK should benefit while the Turkish lira could face pressure as an importer that's already struggling with its current account balance and may be facing a run on FX reserves, according to an FT report on Wednesday that didn't get the traction it deserved.