Qatar (HRNW): The world’s biggest oil producers will huddle in Doha on Sunday in a rare off-scheduled meeting where discussion about what they can do to staunch the continued global surplus of crude oil that’s weighed on prices for nearly two years.
Hopes that members in the Organization of Petroleum Exporting Countries cartel and non-Opec oil suppliers, mostly notably Russia, may agree to freeze production pushed crude oil prices to their highest levels this year ahead of a meeting between the two groups.
“It’s quite significant because meetings like these, not one of the planned two annual meetings that Opec tends to have, is clearly showing the nervousness within Opec and showing … an increased level of awareness within Opec to do something with this surplus,” said Abhishek Deshpande, lead oil market analyst with Natixis.
It’s also important to note the role that non-Opec member Russia is playing during the confab, Deshpande said, without whom the meeting might not be occurring. Since Opec’s policy change in November 2014 from setting oil prices to letting prices float, it has been adamant that production cuts come from producers outside of the cartel.
Brent oil prices has traded around $44 a barrel on Wednesday, while US West Texas Intermediate light crude prices rose to around $42. Both prices are off the 2016 lows of around $29, but about 60% off their 2014 highs. By Friday fear that the oil producers would fail to make a deal had set in and Brent was down to $42 again.
According to Bloomberg, in 2015, US oil and gas explorers lost more than $300bn in market value, and the economies of many oil-producing countries are in shambles because of the low oil prices. Even Saudi Arabia has felt the pinch of persistent low oil prices, drawing down $150bn from its giant rainy day fund, about 20% of its foreign reserves, Deshpande said. The Saudis even floated the idea of an initial public offering of its state-owned oil company, Aramco.
Despite the excitement ahead of the meeting, Deshpande and Scott Roberts, senior portfolio manager, co-head of high yield at Invesco, said this meeting doesn’t immediately solve the oil market’s problems. Roberts called the gathering “largely symbolic” because a production freeze doesn’t mean there will be an agreement for a cut in production which is what is necessary to reduce the current global supply glut.
And as it is, any freeze at this time won’t include Iran. The country adamantly said it will not cut output. It just restarted production following Western sanctions being lifted after Iran agreed to abandon its nuclear program. Then there’s the fact that Opec is pumping a little more than a 1m barrels a day above its stated 31.5m barrel quota.
A production freeze “doesn’t rule out cheating”, Roberts said.
There’s a very good chance that oil prices retreat after the meeting, said Charlie Nedoss, senior market strategist at LaSalle Futures Group. He said the price rise ahead of the meeting was likely from traders looking to avoid being caught on the wrong side of whatever is the outcome. Further, the lack of an agreement could push US prices back down to $38 or $37, he said.
The nearly two years of falling oil prices finally curbed US shale-oil production, which was Opec’s goal, but there’s still a global oil glut, even though demand is strong. Deshpande said without an agreement, global supply will outstrip demand by 1m barrels a day in 2016, adding to the already burdensome inventories worldwide. With an agreement that doesn’t include Iran, that surplus will still average to a hefty 800,000 barrels a day this year.
There’s some discussion that an agreement on Sunday could be a precursor to a cut at Opec’s regular June meeting, but Nedoss, Deshpande and Roberts ruled that out.
“I think it’s just too early to expect something like that,” Deshpande said, adding that Saudi Arabia would likely refuse to any production cuts without Iran agreeing to curb output.
Plus it would be inconsistent with what Iran, Saudi Arabia and Russia need, Roberts said.
An Opec cut may raise prices back to $50, which could bring back some US shale production, Nedoss said, which Opec doesn’t want.
At most, this might be a test to see if members comply with a freeze, he said. Additionally, if there’s a production freeze and demand holds, the surplus may go away by 2017, which was another Saudi Arabian goal when it stepped away from its price-adjustment policy in 2014.
“The fact that they are not that far from seeing markets balance … the likelihood is they would continue with the strategy. It would be surprising if they took the U-turn after losing so much,” he said.