Syed Rashid Husain
IS OPEC endeavoring to 'talk the crude market prices up’ by agreeing to meet informally on the sidelines of the International Energy Forum in Algiers late September? The jury is out!
Crude oil prices had fallen to a four-month low last week, with many underlining that bear sentiments have once again overtaken the crude markets. Many OPEC members were seemingly uneasy. With budgets under strain, the 'fragile five' within the OPEC were reported to be desperate to do something as a group - so as to change the course of events.
Behind the scene efforts, to try and coalesce a joint OPEC response to the prices going below $40 mark earlier the week, were noticeable. The scenario prompted a flurry of energy diplomacy. Venezuelan President Nicolas Maduro took the initiative and spoke to King Salman about ways to boost crude prices. As per wire reports, President Maduro said OPEC should try to return oil prices to the $70 per barrel level.
Maduro also spoke to the heads of state of some other major producers - Russia, Iran and Qatar - so as to carve out the response of the producers to the faltering markets.
Consequent to this behind the scene activity, OPEC president Mohammed Al Sada, the Qatari energy minister, announced plans on Monday to hold an informal meeting in Algiers next month to discuss stabilizing the market.
Markets took the cue and rallied on the possibility of OPEC finally opting to freeze output. In the meantime, Saudi Oil minister Khalid Al-Falih's remarks on Thursday also helped rally the crude prices. Markets firmed up as Falih said the country would be prepared to take “any possible action” necessary to stabilize the crude oil markets. “If there is a need to take any action to help the market rebalance, then we would, of course in cooperation with OPEC and major non-OPEC exporters,” Falih emphasized.
Markets were responsive. From below $40 mark, oil markets swung back, rallying above $40 as the news that OPEC is to meet informally in Algeria in late September broke in. Speculation got rife, that another round of efforts are underway to bring about an agreement amongst the producers about output freeze at a certain level.
But skeptics are all around. Not everyone is hopeful about a real turnaround in market conditions. Many see that despite the efforts, realities on the ground are directing the markets on the opposite path.
On a close look, the Saudi position too is no different from past. Al-Falih underlined it, once again, that Riyadh would be ready to undertake all that is required to do, but indeed in "cooperation with OPEC and major non-OPEC exporters."
This was no different from Doha in June. In Doha too, Saudi Arabia was willing to work out an agreement, provided Iran and all others, contribute to an output freeze regimen. And when Iran refused, the initiative skittled. Hence Iranian cooperation would be necessary for the OPEC to reach a conclusion, one cannot help underlining while interpreting Al-Falih remarks last Thursday. Yet, the timing of the comment was interesting. It did help the market sentiments, one needs to concede.
Actions in the meantime continue to be distinctly bearish.
OPEC output went up in July by 46,000 barrels a day from June to 33.11 million barrels a day, on higher output from member countries.
Saudi Arabia, the world’s largest crude exporter, boosted oil output to a record 10.67 million barrels a day in July, according to OPEC data published Wednesday. This was 30,100 barrels a day higher from a year earlier, the OPEC report added. High domestic demand during the peak summer months of June and July also contributed to the higher output levels, though one needs to point out here.
Iranian output too has risen during the month to 3.85 million barrels a day - the highest since 2008 - according to Iranian Oil Minister Bijan Namdar Zanganeh.
In order to increase sales, Kuwait on Wednesday also cut its pricing to Asia, widening the discount to the regional benchmark to $2.65 a barrel for September from $1.70 a barrel in August.
Iraq too is ramping up output, undertaking aggressive development of its oil fields in collaboration with BP, Shell and Lukoil. This could lead the Iraqi output to rise by up to 350,000 bpd next year, analysts say. At the moment, increased Iraqi output is helping to offset disruptions in supplies from Nigeria and Libya. Analysts have warned resumption in production from these countries could be another bearish factor for the global oil market.
Signals from other parts of the globe too indicate weakness. In a third consecutive weekly build up, US crude inventories rose 1.1 million barrels in the week ending Aug. 5, the US Energy Information Administration (EIA) reported. Analysts polled by Reuters had in fact expected a 1.0 million-barrel crude draw instead.
The US crude inventory build-up overshadowed the drop in US gasoline stocks by 2.8 million barrels last week in the second-biggest weekly draw for the fuel since mid-April. However, it must be noted that the dip in gasoline inventory came while the peak summer driving season was on and the US East Coast refinery runs were hitting 2011 lows.
In the meantime, global crude demand growth is beginning to stutter again. Chinese demand is already showing a swift drop-off over the last three-quarters.
In its monthly Oil Market Report, the IEA projected the global oil demand growth slowing down from 1.4 million bpd in 2016 to 1.2 million bpd in 2017. A “dimmer macroeconomic outlook” has apparently forced the IEA to revise its demand growth outlook down from its previous forecast last month.
Many pundits thus continue to be skeptic about a real rebound in the market. Even the OPEC doesn't seem very hopeful. “Lower-than-predicted demand, high refined product stocks during the peak summer driving season and rising crude supply … have all significantly exerted pressure over the month,” OPEC felt.
“In terms of the group agreeing on a deal that would make a real change to supply, we shouldn't expect anything,” Olivier Jakob of Petromatrix was quoted as saying. “Everyone is more or less producing at capacity.”
With fundamentals continuing to be weak, one shouldn’t expect the markets to rebound in a real manner. For the fundamentals to get stronger, one definitely needs active participation from all. In order to facilitate market stabilization, is every OPEC member ready to take some pain and contribute? Let’s wait and see. Algiers in not too far off!
