In more “normal” times the oil market might have analysed the implications of a highly conditional “output freeze” agreement between a handful of producers amid a persistent supply glut, before reacting.
But these are not normal times. The deal – that actually wasn’t – ended up whiplashing the already panicky market and leaving it hopelessly hopeful.
Brent crude clambered above US$35 as February drew to a close, with NYMEX light sweet futures around US$33 a barrel, both 25 per cent above the year’s lows touched on January 20, though nothing had visibly changed on fundamentals.
What had changed was a lot of jawboning by a few oil ministers upending earlier convictions that an Opec and non-Opec collaboration to rein in supply was out of the question. By the end of the month, the can had been kicked down the road, to a mid-March meeting between major producers flagged by Russian energy minister Alexander Novak.
The fact that crude prices have more than halved since Opec’s landmark decision in November 2014 to defend market share at any cost, leaving producer pockets across the globe in tatters and equilibrium seem increasingly like a mirage, lent credence to the deal between Saudi Arabia, Russia, Venezuela and Qatar at a meeting in Doha on February 16.
Only, it was so conditional – other major Opec and non-Opec producers had to join in for the agreement to take effect – and so watered down – capping output at January levels rather than actually cutting it – that it was hard to take it seriously.
Iran is aspiring to boost exports by 1 million barrels a day (b/d) over the coming months and its oil minister, Bijan Zanganeh, dismissed it as a “joke” in remarks published by the country’s ISNA news agency on February 23 – barely a week after hosting his counterparts from Iraq, Qatar and Venezuela and expressing support for the freeze proposal.
Russia’s Novak, who has been driving the collaboration initiative, suggested a freeze could take effect even without Iran’s participation. Major producers outside Opec expected to be roped in include Mexico and Norway.
A freeze at January levels could remove 1.3 million b/d of oversupply from the markets, Novak said, though he didn’t explain the math behind the number. Some deduced it might mean an absence of the typical seasonal ramp-up in Saudi crude production of up to 750,000 b/d to meet increased demand from power production at home during summer months. But that would leave the kingdom bearing the brunt of the cutback, something hard to fathom, especially without political arch-rival Iran chipping in.
Opec’s second largest producer, Iraq, which hit a new high of 4.33 million b/d in January, remained conspicuously silent on its plans.
Opec’s 13 members pumped 32.43 million b/d in January, about 820,000 b/d above the 31.61 million b/d average 2016 demand for its crude the organisation projected in its February report.
Saudi oil minister Ali Naimi, addressing an industry conference in Houston last week, expressed confidence that major producers, including Iran, would join the freeze pact, but said seeking production cuts would be “wasting our time” as no one would deliver.
Some analysts concluded Saudi Arabia might simply be testing its fellow producers’ willingness to cooperate and comply with a relatively benign freeze commitment (other than for Iran) before proposing a production cut at Opec’s June meeting.
Indeed, as the month progressed, the freeze proposal appeared all entangled with suggestions of a production cutback.
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Non-Opec Oman, for its part, offered to cut output by 10 per cent, or 100,000 b/d, if a deal was reached between major Opec and non-Opec producers.
The Paris-based International Energy Agency, policy adviser to the world’s developed countries, cautioned those forecasting a price recovery in the short term of a “possible false dawn”, citing resilient US shale output, rising stocks, and little apparent chance of coordinated Opec and non-Opec production cuts.
Christopher Bake, a member of Vitol’s executive committee, told the annual International Petroleum week in London that the world could put another 360 million barrels in commercial crude and refined product stocks over the next six months unless supply and demand rebalance, having added 450 million barrels through 2015.
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US shale’s resilience, though, is on test. Bankruptcies and ratings downgrades are on the rise, with the spring round of bank loan redeterminations expected to see a 20 per cent to 30 per cent reduction in the borrowing bases of small and mid-sized producers, who are also fast losing hedging protection due to a depressed forward curve.
US shale doesn’t need US$90 a barrel any more, Dave Hager, chief executive of Devon Energy told the IHS CERAWeek in Houston, but US$55 to US$60 is where the “vast majority” of plays would work. For shale production to actually grow, the industry needs a US$60 to US$70 a barrel price, Scott Sheffield, chief executive of Dallas-based Pioneer Natural Resources, told the same event.
That suggests there could be a “sweet spot” around US$50 to US$55 a barrel, at which conventional and unconventional oil supply balances with global demand. It keeps the most efficient shale oil in business while curtailing the production boom of the past few years; gives some breathing room to the big producing nations while maintaining the pressure on them for greater fiscal discipline and economic diversification; and satiates the growing appetite of the major import-dependent emerging economies while providing them the much-needed relief of reduced foreign exchange outflows.
Vandana Hari is Asia editorial director at Platts and a research scholar at the McGraw-Hill Financial Global Institute