Doubts on the outlook for rise in oil prices

Even as Russia and Opec express their desire for cooperation on output cuts, the top trader says the supply glut will persist.

Khalid Al Falih, the Saudi energy minister, with Alexander Novak, his Russian counterpart, in Riyadh on Sunday. Fayez Nureldine / AFP
Powered by automated translation

A top trader of physical oil products said that roadblocks in the way of an Opec-led agreement on cuts in output are drowning hopes that crude prices will recover over the next year.

Despite energy ministers meeting on Sunday and Monday, and expressing their desire for cooperation, three obstacles still loom over next month’s scheduled full ministerial Opec meeting when a cap in production targets is expected to be officially adopted by the group – Iraq, Iran and Russia. Uncertainty over their willingness to deal is a cause for concern amid a persistent supply glut.

“We’re going to continue to see crude in the low US$40 to $50 [per barrel] range in the short to medium term,” said Thangapandian Srinivasalu, executive director at the oil product trader Gulf Petrochem, which has offices in Dubai and Singapore.

“Surplus of petroleum production is putting pressure on the market for the next year to year and a half.” Gulf Petrochem has storage terminals in India and in Sharjah and Fujairah in the UAE. It plans to expand its operations into East Africa. He was speaking at the Argus Middle East Gulf & Indian Ocean Oil Products Conference in Dubai.

Kevin Wright, the vice president of Asia for commodities pricing agency Argus Media, said: “The fact remains that the world has too much oil and the supply isn’t going away.”

“We may see some trimming by Opec but I don’t think we’ll see a major change in the modus operandi,” Mr Wright said.

Saudi Arabia has been leading a laissez-faire policy for more than two years, whereby Opec had abandoned any production targets in favour of competing for market share, to force the higher-cost producers to curb their supply to balance the market rather than let the burden fall on the Saudis and other low-cost countries.

While those efforts have been showing signs of working, with US output down sharply from its peak in spring last year, progress has been slow and Opec members agreed in Algeria last month to work towards a deal that would accommodate special circumstances for Iran, where nuclear related sanctions were lifted in January, as well as for Nigeria and Libya, which are suffering from civil strife. Iraq, at war against Islamic militants, also wants to bypass any Opec cuts.

Signals from Russian officials have been confusing. Vladimir Putin, the president, backed a pledge to consider joining some kind of freeze while other officials, including Igor Sechin, the head of Russia’s largest oil company, Rosneft, say the company wouldn’t be cutting output.

Russia’s oil minister, Alexander Novak, met Mohammad Barkindo, Opec’s secretary general, in Vienna for talks about cooperation.

The Vienna meeting follows talks Mr Novak held on Sunday in Riyadh with the oil ministers of Saudi Arabia, Kuwait, UAE, Qatar and Bahrain to see if they can reach terms ahead of the Opec meeting on November 30.

There was nothing new in the public statements by officials in Riyadh, with the Saudi oil minister, Khalid Al Falih, reiterating the view that the world oil market is already rebalancing after two years of declining prices, which have knocked out higher-cost production in places ranging from Brazil to the North Sea and the US shale oil patch.

The oil price rout has also led companies to cancel $400 billion of development projects worldwide and led to a deep recession in the industry, with hundreds of thousands of jobs lost. “Low oil prices are putting pressure on GCC countries’ development plans [so] we are working with Russia and other oil producers to stabilise the market,” said Mr Al Falih.

In Vienna, Mr Barkindo was joined by Qatar’s energy minister, Mohammed Saleh Al Sada, the president of Opec, for talks with Mr Novak. “The importance of this cannot be overemphasised,” Mr Barkindo said. “We need sustainable market stability to fund investment in new exploration and production.”

The price of Brent was $51.39 per barrel in afternoon trading.

lgraves@thenational.ae

amcauley@thenational.ae

Follow The National's Business section on Twitter