Why mood shifted in the global oil market – and might shift again
The oil market will hinge on two key reports this week after the mood turned bearish last week, sending prices to their lowest level since major producers agreed to cut output.
The sell-off, which pushed benchmark North Sea Brent crude futures prices down by US$4.53 a barrel, or 8 per cent, over the course of the week to close Friday at $51.37 a barrel, came as traders got jittery about the effectiveness of the output deal, hopes for which had been enough to keep prices in the mid to high $50s a barrel for the past three months.
While the deal came into effect in January, the early indications are that Saudi Arabia is bearing the heaviest load, while other key participants – particularly Russia in the non-Opec group – are lagging behind their pledged cuts.
Comments to this effect by Saudi Arabia’s energy minister, Khalid Al Falih, at the industry’s big annual meeting – CeraWeek in Houston – last week helped to propel the sell-off, while mixed messages from other ministers also played a part.
“Opec is starting to rival the new US administration for communicating mixed messages,” said Amrita Sen, the chief oil strategist at Energy Aspects, a consultancy.
The sharpness of the drop was exacerbated by the fact that speculators had placed large bets in recent weeks that prices would keep rising, according to data from futures exchanges. Covering those bets as prices fell helped speed up the decline.
This week, Opec’s Vienna-based secretariat and the International Energy Agency, the Paris-based energy watchdog for rich countries, will issue back-to-back reports on the state of the oil market in February, including their estimates as to how closely the participating producers were hewing to their pledged cuts.
The reports are likely to hold no big surprises but official confirmation that Saudi Arabia continues to bear the heaviest load while others lag, as well as the fact world oil inventories remain stubbornly high, is likely to feed the scepticism that crept into the market last week.
Mr Al Falih complained during CeraWeek that the kingdom was so far carrying the market, having cut by 900,000 barrels per day from record levels in the autumn to about 9.7 million bpd in January, versus a commitment to cut only to 10 million bpd.
The Saudi minister was more blunt than at anytime since the deal was struck in December, which committed Russia to cut 300,000 bpd and a group of other non-Opec producers to cut a further 258,000 bpd.
Russia has been slow to contribute and Mr Al Falih said his Russian counterpart, Alexander Novak, had told him they would be down by only 160,000 bpd by early this month.
Mr Al Falih talked of “cautious optimism” over the life of the deal, which runs to the end of June, but also warned of “irrational exuberance” and he hedged over whether the deal might be extended when producers meet to review it in May.
Iraq’s oil minister, Jabar Al Luaibi, said Iraq was 85 per cent compliant with its pledged cuts in January and February but said the country planned to boost capacity this year by 500,000 bpd to 5 million bpd. In any case, Iraq’s official figures do not include the Kurdistan region, which produces 600,000 bpd independently each month and is in dispute with the Baghdad government over budgets and control of its oil.
Saudi Arabia agreed only reluctantly to reverse course late last year, having previously wanted market forces to make high-cost producers, like those in the US, cut back in an over-supplied market.
But the recent surge in US shale oil output as prices have increased underpins the original Saudi argument, a view that Mr Al Falih expressed last week.
“Had we waited long enough, had we had the patience to wait and had investments been forthcoming the rebalancing would have taken place,” he said in an interview on US television.
Ms Sen considered Mr Al Falih’s comments overall to be an exercise of brinkmanship to bring laggard producers into line and to worry investors in US shale, but she added that the effect might not be the desired one.
If US shale producers start to think that prices have peaked they may sell futures to lock in prices for their production, which would both continued production and futures selling. That could provide “a potent mixture that can drive prices sharply lower in the near term, [and] few will have the ability to catch this falling knife just yet”, she said.
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Updated: July 21, 2017 06:47 PM