Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why the oil majors’ meeting in Algiers is unlikely to bring resolution to the production impasse…
The price of a barrel of brent crude oil sits at the mid-point of a tight $45.5-$50/barrel September range, one which has already closed in from a wider $42-$53 from April through to mid-August. Investors are pausing for thought, price activity narrowing as they await the outcome of an informal Opec-led meeting on the sidelines of the International Energy Forum in Algiers, Algeria on 26-28 September. It is here that we hope to finally hear some real progress regarding an agreement between major oil-producing nations to curb excessive output, stabilise the market and solve the global supply glut. This would likely help the oil price rally quite significantly.
We have been here before though, if you cast your mind back to April in Doha. The risk is we simply end up with yet another unanimous agreement that a freeze is necessary but which nobody is willing to implement, because they don’t trust fellow attendees to honour the promise and/or because they can’t afford to cap production themselves. With oil prices down at $45 versus the $100+ they traded at when times were good, most oil-reliant nations are hurting badly – Opec mouthpiece Saudi Arabia included. The latter has resorted to selling bonds and is prepping for a future IPO of state oil company Saudi Aramco. A painful adjustment is becoming increasingly necessary within the group to rebalance previously oil-funded public finances with much lower oil receipts.
Conflicting comments from oil ministers as the meeting approaches does little to inspire confidence. The Saudis, Iranians and Russians are keeping us entertained. Buy the build-up, sell the meeting has proved the correct strategy so far this year.
While a failed meeting risks sending oil prices lower, a host of drivers are, nonetheless, keeping prices from falling markedly: the buck-denominated commodity is buoyed by expectations of a delay to US Fed rate rises, something we don’t see happening until March next year at the earliest; the energy commodity remains in recovery mode with technicals still showing supportive rising lows around $45 since the very depressed 12/13 year lows (<$28) in January; global growth has not collapsed, even if remains sluggish to say the very least; there is no sign yet of a Chinese hard landing (big oil consumer).
Also, monetary stimulus/accommodating policy remains in abundance from all the major central banks; geopolitical instability in the Middle East remains ever-present; and US oil inventories continue to oscillate around breakeven, never straying too far (last week’s aberration drawdown was due to a storm).
As with the Fed and its rate rises, I struggle to see how we can get a unanimous agreement to freeze production or respect caveats this month, which means prices are highly likely to correct. But I also expect the build-up to generate much excitement and a price rally beforehand, meaning the ensuing correction merely retraces the up-move and doesn’t do too much damage.
After all it’s in every participants' interest to talk up the price, but in nobody’s interest to see it break the 2016 recovery uptrend. Expect lots of chat and media comment for something that will likely amount to nothing more than another round of tea and biscuits and agreeing to disagree by the great and good (and bad) of the oil world.
This commentary was produced exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.
FinnCap’s Dougie Youngson tells Hot Commodity why he is sceptical about recent talk of cuts to oil production…
Oil prices ticked up again at the beginning of this week as investors continued to hope that that the current glut of oil production could finally start to fall. Last week Saudi Arabia, Venezuela and Qatar announced they were proposing to freeze production at January’s level. But any deal is dependent on the participation of Iraq and Iran. Both are said to be supportive of the “big freeze”, but have yet to commit to the group. Oil-field-services firm Baker Hughes also said last Friday that the number of rigs drilling for oil in the U.S. fell by 26 last week to 413, down 68% from a peak in October 2014. But in both cases we are looking at freezes on current production levels, not cuts, and these countries will continue to produce above quota.
There is actually a practical reason for not making cuts. Once you shut in a well it can be difficult to bring it back online at the previous levels of performance. Shut in wells rarely return to former production rates, and this is a serious concern given the cuts that are required in order bring production in line with demand. This issue is particularly pronounced in Russia, which can be victim to a more common kind of freeze. Its shut in wells tend to get quickly filled up with water, and come winter this water freezes, which has a devastating effect on both the reservoir and infrastructure.
It’s not just the threat of gammy wells that mean producers are unlikely to shut down production. After all, what incentive does Saudi Arabia really have to reduce production? Why should they help out the rest of the industry? If they can still make a profit at the current oil price then they have little incentive to change. Oil is a finite resource and their oil supplies won’t last forever. So it makes more sense for them to keep production high, so that they can maintain their market share and enhance margins when the oil price does eventually recover.
Ultimately, any resolution on production levels will simply act as a sticking plaster. Key countries may well say they will rein in their overproduction, which is no bad thing. Demand is also forecast to increase by one to two million barrels per day, and this increase could help mop up the overproduction by the end of the year. However, what people say they will do and what will actually happen are two very separate things. The only certainty is that producers will act in their own interests, whatever they may be.
This commentary was provided exclusively for Hot Commodity by FinnCap.
Iran’s oil minister Bijan Zanganeh is a consummate politician.
Today he has single-handedly managed to boost the oil price and send Twitter crazy by implying that he will cooperate with other producers in freezing production, without actually saying…anything.
As it stands, the Saudi-led output freeze pledge is pretty lacklustre anyway. Confirming that you won’t lower production from near all-time highs will do very little to address the huge supply glut and slowed demand.
But without Iran’s cooperation, the deal goes from pretty lacklustre to downright useless. Iran, recently freed from international sanctions, was one of the world’s largest oil producers before the embargoes and if it decides to ramp up production then it will render a Saudi/Russian/Qatari/Venezuelan output freeze largely ineffective.
Zanganeh hasn’t explicitly said whether he would freeze production or not, instead sticking to newspeak mumblings of “support” and a “good meeting”, but this in itself speaks volumes.
The fact that the oil price has now lifted above $34 a barrel on this “news” shows exactly why the market should be taken with a pinch of salt.
To read the full story, go to: http://www.hotcommodity.co.uk/2016/02/17/brent-crude-iran-oil-output-freeze/