WEBVTT - How a 10-Minute Video Call Changed the Oil Market

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News.

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<v Speaker 2>This week, oil executives and officials from some of the

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<v Speaker 2>world's largest oil producers countries like Saudi Arabia and Nigeria

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<v Speaker 2>are gathering in Vienna, where OPAK, the Organization of the

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<v Speaker 2>Petroleum Exporting Countries, is headquartered, and the purpose.

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<v Speaker 1>Is to bring together is some of the biggest players

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<v Speaker 1>in the space.

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<v Speaker 2>Bloomberg's Germani Brassecci is in Vienna covering Ope's gathering, and

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<v Speaker 2>given what's been happening recently, there is a lot for

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<v Speaker 2>the group to discuss.

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<v Speaker 1>Remember, we are coming off the most volatile period for

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<v Speaker 1>oil in the last couple of years.

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<v Speaker 2>We're coming on the air with breaking news. Israel has

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<v Speaker 2>just launched air strikes into Iran.

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<v Speaker 3>Massive precision strikes are on the three key nuclear facilities

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<v Speaker 3>in the Iranian regime.

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<v Speaker 1>After that twelve day war between Iran and Israel, we

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<v Speaker 1>saw massive geopolitical premium get priced into the oil curve,

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<v Speaker 1>and here we are pretty much all of that geopolitical

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<v Speaker 1>premium was wiped out. Coming on the heels of another

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<v Speaker 1>big OPECH plus decision.

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<v Speaker 2>OPEK plus, which includes even more oil producing countries, made

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<v Speaker 2>a surprise move over the weekend, it announced plans to

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<v Speaker 2>boost oil production by more than half a million barrels

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<v Speaker 2>a day, a big production increase at a time when

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<v Speaker 2>investors are worried about oversupply. Now the world's largest oil

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<v Speaker 2>producers are at a crossroads, and what happens next could

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<v Speaker 2>ripple through the global economy. I'm David Gerret and this

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<v Speaker 2>is the big take from Bloomberg News today. On the show,

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<v Speaker 2>what OPEC Plus's production surge says about the influence it

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<v Speaker 2>has on oil markets. Today, we look at what motivated

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<v Speaker 2>the alliance's latest move, what it means for markets, and

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<v Speaker 2>who actually calls the shots in the multi trillion dollar

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<v Speaker 2>oil industry. The Organization of the Petroleum Exporting Countries is

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<v Speaker 2>a coalition that dates back to the nineteen sixties. At first,

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<v Speaker 2>its membership consisted mostly of Gulf states like Iran, Iraq

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<v Speaker 2>and Saudi Arabia, but over the years its ranks have

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<v Speaker 2>expanded to include countries like Ecuador, Indonesia and Nigeria, and

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<v Speaker 2>about a decade ago, an alliance called OPEK plus formed,

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<v Speaker 2>which includes an additional ten oil producers, including Russia and Kazakhstan.

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<v Speaker 1>The purpose is to coordinate oil production policy around the

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<v Speaker 1>world to keep prices stable and to ensure that you're

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<v Speaker 1>both maximizing potential revenue for producers but at the same

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<v Speaker 1>time keeping prices affordable for consumers.

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<v Speaker 2>For years, OPEK was the major player in the global

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<v Speaker 2>oil market, but it doesn't have as much influence as

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<v Speaker 2>it used to. The United States has become a major

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<v Speaker 2>player after it ramped up the extraction of shale oil

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<v Speaker 2>through a process known as fracking. The US is now

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<v Speaker 2>the largest oil producer in the world, and notably, it

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<v Speaker 2>is not a member of OPEC or o PECK plus.

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<v Speaker 1>So as it stands today, OPEK plus their decisions still

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<v Speaker 1>matter hugely, but of course they're not the only game

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<v Speaker 1>in town.

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<v Speaker 2>Still, what these countries decide to do when it comes

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<v Speaker 2>to how much oil they produce can send shockwaves through

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<v Speaker 2>the global economy. That happened back in twenty twenty three

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<v Speaker 2>when OPEC plus decided to cut production by an additional

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<v Speaker 2>one million barrels a day. The cuts were meant to

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<v Speaker 2>rebalance the global oil supply. Crude prices had fallen and

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<v Speaker 2>analysts were predicting a glut ahead, and.

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<v Speaker 1>Therefore they took the decision to withhold barrels ie, to

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<v Speaker 1>withhold production from the markets, and so called these voluntary

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<v Speaker 1>cuts because then a group of eight producers started withholding

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<v Speaker 1>production from the markets per and agreed schedule, and the

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<v Speaker 1>whole purpose of that was to introduce again some price stability.

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<v Speaker 1>Initially those cuts were meant to be around for say

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<v Speaker 1>six months or so, they kept getting extended, but then

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<v Speaker 1>at the beginning of this year, so around on spring

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<v Speaker 1>of twenty twenty five, they announced that they were going

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<v Speaker 1>to start slowly unwinding the cuts that were introduced in

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<v Speaker 1>twenty twenty three.

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<v Speaker 2>In other words, OPEC plus was shifting course and boosting

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<v Speaker 2>production again.

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<v Speaker 1>The plan was to do it gradually, bringing back slowly,

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<v Speaker 1>slowly a little bit more than one hundred and thirty

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<v Speaker 1>thousand barrels a day. But what has happened in the

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<v Speaker 1>last four months, they've accelerated the putback. So from May

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<v Speaker 1>June July they surprised the market by increasing monthly production

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<v Speaker 1>by more than four hundred thousand barls per day.

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<v Speaker 2>That's three times the volume initially scheduled in those first

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<v Speaker 2>three months. Jamana says there are a number of reasons

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<v Speaker 2>for the recent surgeon production, among them a desire by

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<v Speaker 2>opek's most powerful member, Saudi Arabia, to punish members like

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<v Speaker 2>Kazakhstan and Iraq which exceeded their quotas. Then there's the

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<v Speaker 2>growing influence of non OPEC producers.

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<v Speaker 1>You were seeing a huge pickup in supply from the

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<v Speaker 1>likes of Canada, Brazil, Guyana, so their non OPEC countries

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<v Speaker 1>bringing their extra production to the market, and that's obviously

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<v Speaker 1>got to be a concern for OPEC from a market

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<v Speaker 1>share perspective. So when analysts were analyzing this decision and

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<v Speaker 1>trying to, you know, put together the rationale for why

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<v Speaker 1>OPEC plus decided to accelerate the unwines of these vluntry cuts,

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<v Speaker 1>one of the clear rationals was because they felt that

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<v Speaker 1>they were one losing market share. Two of course they

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<v Speaker 1>felt that the market could handle it. And then three

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<v Speaker 1>and this probably isn't something that they would say explicitly,

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<v Speaker 1>but of course you do have a president in the

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<v Speaker 1>White House who repeatedly talks about his desire to see

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<v Speaker 1>lower oil prices. And I'm also going to ask Saudi

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<v Speaker 1>Arabia and OPEK to bring down the cost of oil.

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<v Speaker 2>You got to bring it down.

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<v Speaker 1>And perhaps they sense an opportunity both politically and economically

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<v Speaker 1>to put more barrels back into the market, but also

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<v Speaker 1>appease the United States.

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<v Speaker 2>Let me stick with that for a second. So as

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<v Speaker 2>you say, it's no secret that President Trump wants low

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<v Speaker 2>oil price and he's been pressuring OPEK to slash prices

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<v Speaker 2>for months now. He met with OPEC leadership on his

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<v Speaker 2>recent tour of the Persian Gulf. To what degree was

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<v Speaker 2>this a direct response to that? Of course, the US

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<v Speaker 2>not a party of OPEC or OPEC. Plus, how much

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<v Speaker 2>influence does does the US have and how much is

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<v Speaker 2>this attributable to what the President's been saying.

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<v Speaker 1>They will not tell you directly, but I mean, for

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<v Speaker 1>sure they're going to be motivated and influenced by the

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<v Speaker 1>US and by a very vocal president sitting in the

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<v Speaker 1>White House. But then also don't forget that if prices

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<v Speaker 1>go too low, then that also backfires on some of

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<v Speaker 1>the drillers and the US producers as well, because already,

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<v Speaker 1>if you look at say the riccounts, the active oil

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<v Speaker 1>riccounts in the US this year, they're back down to

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<v Speaker 1>low's not seen since September twenty twenty one. And why

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<v Speaker 1>is that the case? Because oil prices are lower and

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<v Speaker 1>so if you think about it from OPI plus's perspective,

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<v Speaker 1>maybe they're willing to tolerate lower prices if that also

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<v Speaker 1>means that they're building market share and they are reducing

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<v Speaker 1>the ability of some of their big competitors in the US,

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<v Speaker 1>these shale drillers to also bring production to the market.

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<v Speaker 2>So opek plus seems willing to deal with lower oil prices.

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<v Speaker 2>And this weekend's decision confirms that their members gathered on

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<v Speaker 2>a video conference call and it didn't take long for

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<v Speaker 2>them to announce that in August they will add five

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<v Speaker 2>hundred and forty eight thousand barrels of oil to the

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<v Speaker 2>market every day.

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<v Speaker 1>It was a ten minute meeting, so it was fairly quick.

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<v Speaker 1>Every one of those members who were part of the

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<v Speaker 1>voluntary cutting group were in unanimous support of this decision.

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<v Speaker 1>There really seems to be a desire to get these

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<v Speaker 1>barrels back to the market now. Their justification at the

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<v Speaker 1>time when they put out the statement on Saturday, they

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<v Speaker 1>said that the market fundamentals support it. They spoke about

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<v Speaker 1>lower inventory. It seems as though opek plus the voluntary

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<v Speaker 1>cutters did see a window of opportunity here to bring

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<v Speaker 1>back those extra bowels to the market without upsetting oil

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<v Speaker 1>prices too much. And actually, if you look at the

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<v Speaker 1>price reaction, say in Brent on Monday, it barely dipped

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<v Speaker 1>to we're down about half a percent and actually were

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<v Speaker 1>higher on the week now since they made this decision,

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<v Speaker 1>which does tell you that perhaps a certain extent the

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<v Speaker 1>market was ready to absorb these extra bellels. But then,

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<v Speaker 1>of course the question becomes, this is now what happens

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<v Speaker 1>in a couple of months time once the seasonal demand

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<v Speaker 1>drivers are out of the way.

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<v Speaker 2>That OPEC plus news broke on Saturday, and on Sunday,

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<v Speaker 2>global markets were surprised again by another move, this one

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<v Speaker 2>by opek's most powerful member and the world's second largest

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<v Speaker 2>oil producing nation, Saudi Arabia. We dig into that after

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<v Speaker 2>the break on Sunday, a day after OPEC plus decided

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<v Speaker 2>to boost production by more than half a million barrels

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<v Speaker 2>a day in August, Saudi Arabia's state owned oil company,

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<v Speaker 2>Saudi Aramco, announced it would raise oil prices in Asia

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<v Speaker 2>next month by more than expected. It would raise the

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<v Speaker 2>price of its most popular crude oil by one dollar

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<v Speaker 2>a barrel. Bloomberg'stremani Brassecci explains why that is so significant.

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<v Speaker 1>That was a bit surprising and does actually reflect the

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<v Speaker 1>fact that ARAMCO do see healthy demands coming from those

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<v Speaker 1>parts of the world, and for Saudi Arabia their biggest

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<v Speaker 1>buyers coming from the East and coming from Asia. That

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<v Speaker 1>was actually quite notable. And I will tell you I've

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<v Speaker 1>spoken recently to the aram COO CEO to Aminaser before

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<v Speaker 1>the open plus decision, before the Iran is there a

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<v Speaker 1>war even and he was saying that he actually does

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<v Speaker 1>see the market as pretty balanced. They still see healthy

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<v Speaker 1>signals coming through from Asia, despite the naysayers there and

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<v Speaker 1>the fact that many in the industry seem to think

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<v Speaker 1>that demand from China will be leveling off as there's

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<v Speaker 1>been more of a push towards electric vehicles. But the

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<v Speaker 1>signals that Iramko seem to be picking up are strong.

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<v Speaker 1>Otherwise they would not have been able to push through

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<v Speaker 1>those extra price hikes. So that is quite notable.

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<v Speaker 2>I wonder if anything stood out to you from that

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<v Speaker 2>conversation just about his perspective on the global oil market,

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<v Speaker 2>his confidence, I suppose, and they're being buyers for oil

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<v Speaker 2>going forward.

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<v Speaker 1>One thing that I learned was he said that because

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<v Speaker 1>they're sitting on a three million barrel's day of extra capacity,

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<v Speaker 1>So spare capacity every one million provides a cushion for

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<v Speaker 1>a ten dollars drop in the price of oil, which

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<v Speaker 1>is quite notable from a revenue perspective.

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<v Speaker 3>Other companies do not have that to push in any

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<v Speaker 3>drop and prices. For us, we do have that spare

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<v Speaker 3>capacity that is healthy strong.

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<v Speaker 1>What he was trying to say is Saudi Arabia Aroundco

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<v Speaker 1>can actually stomach slightly lower prices given how much spare

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<v Speaker 1>capacity that they're sitting on, They'll just pump more, but

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<v Speaker 1>at lower prices, so net net, from their perspective, it

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<v Speaker 1>sort of adds up.

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<v Speaker 3>Producers do not have that additional battles to put in

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<v Speaker 3>the market. We do have that additional battles and it

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<v Speaker 3>gives us strong benefit in terms of impact on our

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<v Speaker 3>net income.

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<v Speaker 2>My sense was that that Wall Street's expectation is there's

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<v Speaker 2>going to be a surplus of oil here in the

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<v Speaker 2>second half of this year. Maybe a dumb question, but

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<v Speaker 2>where does Sadi Rabe, where did these other producers think

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<v Speaker 2>that the market for this oil is going to be

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<v Speaker 2>How confident are that they're going to be buyers for

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<v Speaker 2>all of this oil that they're producing.

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<v Speaker 1>As of now, they seem to be pretty confident, unclear

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<v Speaker 1>how this is all going to pan out in a

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<v Speaker 1>couple of months time. So this is a time of

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<v Speaker 1>year where the seasonals do work in their favor. You

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<v Speaker 1>have global refineries operating at very high intensity, but that's

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<v Speaker 1>expected to subside by the end of the summer. You

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<v Speaker 1>have high energy demands coming out of some of these

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<v Speaker 1>Gulf nations because of the heat at this time of

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<v Speaker 1>the year, you know, operating air conditioning units. You have

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<v Speaker 1>high demand for transport fuel out of some of these

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<v Speaker 1>western nations. So once the seasonals are out of the way,

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<v Speaker 1>when you want to see what happens to demand. So

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<v Speaker 1>question of whether also some of the macro uncertainties in

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<v Speaker 1>the air, things related to terriffs, to global economy, to

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<v Speaker 1>China demand, the incremental fiscal boosts that you're going to

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<v Speaker 1>get from some of these big packages that being announced,

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<v Speaker 1>whether all of that is going to move the needle

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<v Speaker 1>on demand as well. Those are things that you want

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<v Speaker 1>to think about. Let's say you get a nuclear deal

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<v Speaker 1>between US and Iran, does that mean you get a

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<v Speaker 1>reduction and sanctions? Does that mean that this mancher of

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<v Speaker 1>maximum pressure will be released, and therefore Iranian oil, which

0:12:36.000 --> 0:12:38.319
<v Speaker 1>by the way hasn't taken a big production hits, I

0:12:38.360 --> 0:12:42.000
<v Speaker 1>should note, will be freer to be sold to all

0:12:42.040 --> 0:12:43.959
<v Speaker 1>of these other willing buyers around the world as well.

0:12:43.960 --> 0:12:46.840
<v Speaker 1>So these are questions that we just don't know. But

0:12:46.920 --> 0:12:49.800
<v Speaker 1>you mentioned Wall Street being pretty bearish, and it's exactly

0:12:49.840 --> 0:12:52.880
<v Speaker 1>because of that. The likes of Goldman, for example, see

0:12:53.160 --> 0:12:57.079
<v Speaker 1>supply growing at four times the speed of demand over

0:12:57.320 --> 0:12:59.480
<v Speaker 1>the next three to four quarters. And on the back

0:12:59.520 --> 0:13:02.880
<v Speaker 1>of that, and the likes of JP Morgan City are

0:13:02.920 --> 0:13:05.360
<v Speaker 1>pretty bearish on where the price of Brent gets too,

0:13:05.400 --> 0:13:07.640
<v Speaker 1>and most of them have their forecast around sixty five

0:13:07.679 --> 0:13:09.280
<v Speaker 1>sixty dollars by the end of this year.

0:13:09.920 --> 0:13:13.680
<v Speaker 2>OPEC plus has its next meeting on August third. Jamana

0:13:13.720 --> 0:13:17.000
<v Speaker 2>says she'll be watching for a few things, namely, will

0:13:17.000 --> 0:13:19.840
<v Speaker 2>the group stay the course, will it effectively get oil

0:13:19.880 --> 0:13:22.679
<v Speaker 2>production back to where it was before it imposed those

0:13:22.760 --> 0:13:24.200
<v Speaker 2>cuts in twenty twenty three.

0:13:24.760 --> 0:13:27.960
<v Speaker 1>The other thing to watch out for always compliance whether

0:13:28.080 --> 0:13:29.800
<v Speaker 1>or not some of those big producers, the ones that

0:13:29.840 --> 0:13:33.600
<v Speaker 1>have been over producing, we'll start cutting back ultimately for

0:13:33.760 --> 0:13:37.880
<v Speaker 1>the cohesion of the group, though all of these different countries.

0:13:37.920 --> 0:13:41.679
<v Speaker 1>These producers want to be producing as much as they

0:13:41.679 --> 0:13:45.640
<v Speaker 1>possibly can with prices as high as they possibly can, right,

0:13:45.840 --> 0:13:49.320
<v Speaker 1>and so this is the paradox for Opek. They're trying

0:13:49.360 --> 0:13:51.920
<v Speaker 1>to keep prices stable, but they also want to grab

0:13:51.960 --> 0:13:54.720
<v Speaker 1>on some market share. This is an environment where they

0:13:54.720 --> 0:14:00.320
<v Speaker 1>have a lot more competition than they've ever had in history.

0:14:03.280 --> 0:14:05.760
<v Speaker 2>This is the Big Take from Bloomberg News. I'm David Gura.

0:14:06.080 --> 0:14:08.520
<v Speaker 2>To get more from The Big Take and unlimited access

0:14:08.559 --> 0:14:11.880
<v Speaker 2>to all of Bloomberg dot com, subscribe today at Bloomberg

0:14:11.920 --> 0:14:15.440
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0:14:15.520 --> 0:14:17.559
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0:14:20.360 --> 0:14:22.320
<v Speaker 2>Thanks for listening. We'll be back tomorrow.