VIENNA – As Opec’s latest meeting wrapped up in Vienna on Thursday night, ministers congratulated each other on its rare spirit of amity and consensus. The talks were, without a doubt, a success.
But two hours later, one veteran delegate was staring in despair at the numbers flashing red on his smartphone showing crude down some 5% to US$51 a barrel.
“That is a disaster,” he said.
While Opec has worked hard in recent years on improving communication to ensure the right message is delivered to financial markets, Thursday’s experience showed the 14-member group and its non-Opec allies still have a long way to go.
The problem was not what was delivered, but what appeared to have been promised beforehand, industry analysts said.
Opec agreed on Thursday to extend its existing production cuts by nine months – more than the initially suggested six months – in tandem with non-Opec producers, including Russia.
But hints from the group that it could deepen supply cuts, extend them by as long as 12 months, curtail exports and tell the market how exactly it would terminate supply curbs in 2018 had raised market expectations much higher.
“Opec oversold the meeting to the market way too early,” Amrita Sen, from the consultancy Energy Aspects, told Reuters in Vienna.
The market reaction was all the more disappointing given that from Opec’s perspective, the meeting went very well.
“I have been in Opec close to 20 years. It’s the first time that I witness 100% compliance (with cuts) from Opec and close to 100% from non-Opec,” Iranian Oil Minister Bijan Zanganeh told Reuters afterward.
Opec’s No.3 producer, Iran has repeatedly clashed in past meetings with Opec’s de-facto leader, its political arch-rival Saudi Arabia.
Russia, which effectively is fighting a proxy war with Saudi Arabia in Syria, said on Thursday its energy cooperation with Riyadh would last well into the future.
In its statement, Opec said it could extend curbs further or cut more.
Normally, all this would be more than enough to trigger a bull rally.
“It’s strange. I don’t know why (the market crashed),” Zanganeh said.
Whatever it takes
Opec and non-Opec oil producers first agreed to cut output in December 2016 – the first joint deal in 15 years – and said the curbs could be extended by a further six months.
The extraordinary move was aimed at battling a global glut of crude that halved prices from 2014, forcing Russia and Saudi Arabia to tighten their belts and leading to unrest in Venezuela and Nigeria.
The cuts helped push oil prices back above US$50 per barrel but also spurred growth in the US shale industry, which does not participate in the output deal. That slowed a rebalancing of supply and demand, with global inventories still near record highs.
As the price fell back towards US$47 in early May, near a six-month low, Saudi Energy Minister Khalid al-Falih said Opec would do “whatever it takes” to rebalance the market, including a longer extension for the output cuts.
“If you declare nine months in advance, people are bound to expect more,” Sen said. Russia also added to the expectations by saying this week that cuts could be prolonged by 12 months.
The market was also disappointed Opec did not mention its previously stated plan to bring stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion, said Olivier Jakob from the Petromatrix consultancy.
“The December meeting was a breakthrough,” he said. “The meeting yesterday gives us, however, a feeling that Opec is fatigued by the lack of results so far and does not have a consensus anymore to have the five-year average in stocks as a policy target.”
The fact that Iran, Libya and Nigeria remain exempt from cuts suggested Opec was not yet ready to take additional measures, Jakob added.
Dave Pursell, managing director at Tudor, Pickering, Holt & Co, a Houston-based bank working with US shale producers, predicted markets would rebalance within six months.
“The market was hoping for deeper cuts,” he said. “But I do think oil prices, three months from now, will be higher than they are now.”
– Reuters
Saudi Arabia To Trim Oil Exports To US To Force Inventories Lower
By Zainab Calcuttawala - May 26, 2017, 5:00 PM CDT
Riyadh plans to purposely reduce exports to the United States to force a reduction in the latter’s sizeable inventories, which are preventing a greater rise in global oil prices, according to Saudi Oil Minister Khalid Al-Falih.
Just one day after OPEC announced a nine-month extension to its November production cut deal, the top oil official told reporters on Friday that “exports to the U.S. will drop measurably.” Two sources close to the matter told Bloomberg that starting next month, Saudi crude supplies to American importers will be reduced to below one million barrels a day next month – a 15 percent decrease from the monthly average so far in 2017.
The Organization of Petroleum Exporting Countries’ (OPEC) deal does not set limits on the amount any member country can export to its customers. This is why Saudi cargoes to the U.S. in recent months have totaled 1.21 million barrels a day – the highest rates since 2014, the year of the oil price crash. As the de facto leader and largest producer of OPEC, Saudi Arabia has cut its production the most of any member of the bloc. But stubbornly high fossil fuel inventories - which have been maintained worldwide, but are most readily measured in the U.S. due to open customs data – have prevented the measures from buttressing oil prices in a lasting way. Importer nations have opted to take advantage of low oil prices to stock up for the future.
The Energy Information Administration reports that American crude inventories have been on a downward trajectory in recent weeks, so the lower shipments may have a magnified impact as they are doled out.
Bloomberg also noted that Saudi Arabia generally has less oil to supply to the U.S. in summer months due to amplified domestic demand for cooling needs during the scorching desert summer.
By Zainab Calcuttawala for Oilprice.com
OIL PRICE CRASHES DESPITE DEAL TO EXTEND OUTPUT CUT
The price of oil has plummeted by about 5%, despite oil-producing nations agreeing to extend production cuts for a further nine months.
Meeting in Vienna, energy ministers from both Opec and non-Opec countries agreed to maintain output curbs, due to expire next month, until March 2018.
But investors had been hoping the oil producers would go further.
Brent crude is $2.60 lower at $51.36 a barrel, while West Texas Intermediate is down $2.58 at $48.78 a barrel.
Saudi Arabia’s energy minister, Khaled al-Falih, who co-chaired the meeting with his Russian counterpart Alexander Novak, said: “We considered various scenarios from six to nine to 12 months and we even considered options for higher cuts.
“All indications are solid that a nine-month extension is the optimum, and should bring us to within the five-year average of inventories by the end of the year.”
Opec countries and 11 other oil-producing nations, including Russia, first agreed to reduce production last December in an effort to boost flagging prices.
The reduction was almost 1.8 million barrels per day – equivalent to about 2% of global oil production.
Analysts criticised Opec’s failure to make deeper cuts to production.
Chris Beauchamp at online trading firm IG, described Mr Falih’s belief that greater reductions were not needed as “quaint”, while Alexandre Andlauer of equity research firm Alphavalue said Opec’s strategy was “old-fashioned”.
Neil Wilson at ETX Capital said Opec members “bottled it”, adding: “A nine-month extension just isn’t enough to really lift oil prices as we’ll continue to see US shale fill the gap. Having said they’d do whatever it takes, Opec is looking a bit toothless now.
“Faced with kind of glut and the scale of the market, the cartel would be better off cutting a lot deeper but for less time than trying to prolong fairly timid cuts.”
Gary Ross, head of global oil at PIRA Energy, part of S&P Global Platts, said: “Russia has an upcoming election and Saudis have the Aramco share listing next year, so they will indeed do whatever it takes to support oil prices.”
Analysis: Andrew Walker, BBC economics correspondent
Investors in the financial markets weren’t much impressed by this agreement. The price of crude oil has fallen.
The Vienna deal was perhaps the minimum they expected, after reports of widespread support among the countries concerned for a nine-month extension.
Some thought the production cuts might be deepened and were disappointed when the group simply extended the existing ceiling.
In any event Opec and the other countries involved have a problem with the American shale oil industry.
Cutting production creates a space in the market that shale producers can step into and higher prices make them more profitable. They will be the unintended beneficiaries of the Vienna agreement, even if it does succeed in the group’s objective of getting commercial stocks of crude oil down.
There is quite an irony in that. After all the rise of US shale is one of the central reasons Opec, Russia and the other countries had a problem to start with.
– http://www.bbc.com/
