Syed Rashid Husain
CRUDE market sentiments appear upbeat, despite the Doha debacle.
Speculators are back in play, reports are asserting, betting that the worst is over and the glut may be easing. Strong gasoline consumption in the United States, increasing signs of declining production around the world and oilfield outages have underpinned a return to investment in the sector, traders are now insisting.
Oil prices were higher Friday as investors continued to buy back into commodities, betting oversupplied markets will ease later this year, Wall Street Journal said, quoting brokers and analysts. The rally now has oil up oil about 65% in two months, confounding all those who expected it to lose steam after OPEC failed to reach a deal to cap production.
Production disruptions in Kuwait, Nigeria and Venezuela indeed added to the positive sentiment. Markets also took note of the fall in US output, to 8.953 million bpd last week, down from the peak of 9.7 million bpd last April. It is now expected to touch 8.6 million bpd mark later this year.
Analysts and brokers however, are also pointing to momentum from investors’ broadly buying back into the commodities sector, as another factor fueling the current Bull Run. Commodity hedge funds received more money than they redeemed in March, the seventh-straight months of inflows, data from eVestment underlined. The trend reversed a long period of declines, and the funds added $4.1 billion in the first quarter, their best quarter in nearly seven years.
The hope of markets rebalancing from the current surplus in supply hinged basically on the possible decline in US oil production. The US accounted for the bulk of non-Opec’s 2016 oil supply contraction of 700,000 barrels per day forecast.
However, the question what if the decline in the US oil supply proves insufficient to tighten balances, remains a big if. Markets are bullish despite rather weak fundamentals. To what extent the bull run would sustain is anybody’s guess. “The sentiment in commodity markets has clearly shifted toward being more bullish,” said Jeffrey Currie of Goldman Sachs in a note to clients. But “we believe that it is not yet driven by a sustainable shift in fundamentals.”
Fundamentals are indeed not back to normal and could be stretched further if Russia, Saudi, Iran and others open the taps further. The Kingdom could increase output to 11.5 million barrels a day right away, and up to 12.5 million within six to nine months “if we wanted to,” asserts Prince Mohammad bin Salman.
Russia too said on Wednesday it was prepared to push oil production to historic highs. “They (Saudis) have the ability to raise output significantly. But so do we,” Russian Energy Minister Alexander Novak told journalists on Wednesday on the sidelines of an international energy conference in Moscow. He said Russia was “in theory” able to raise production to 12 million or even 13 million bpd from current record levels of close to 11 million bpd.
Tehran too has been reiterating its intention to boost output to 4 million bpd. Libya could also rapidly ramp up oil production, the head of Libya National Oil Corporation (NOC) told an oil summit in Paris.
All these have the potential to counterbalance the loss in US output. And it was apparently in this perspective that the Goldman Sachs note underlined; oil markets aren’t likely to shift sustainably until at least the third quarter, warning all these could be setting up the market for a fall in the meantime, too.
Earlier last week, market intelligence firm Genscape reported a buildup of more than 840,000 barrels in US crude in the four days to April 19 at the Cushing, Oklahoma delivery point. This adds to the concern that the ongoing rally could coax US shale crude producers to raise output.
A number of analysts are hence skeptical about the sustainability of the rally given that the supply disruptions are temporary. Kuwait, for instance, where production nearly halved earlier this week due to an oil workers’ strike, is seeing output return to its normal level.
“If you were to take the fundamental pieces of the puzzle, they really don’t compare with the latest few days of pickup in prices,” said Harry Tchilinguirian, global head of commodity strategy at BNP Paribas was quoted in the press as saying.
“While these adjustments deal with near-term surpluses through oil supply disruptions…they do not address the longer-term supply problems of excess capacity,” Currie said. “We believe the current decline in US oil production is still insufficient to offset low-cost supply growth such as Iran, particularly should disruptions in Iraq, Nigeria and Venezuela reverse.”
“The oil market has not yet returned to a balance of supply and demand factors, leaving the market oversupplied for much of this year,” said Rob Haworth, senior investment strategist at the Private Client Reserve at US Bank.
The head of the Oil Industry and Markets Division at the International Energy Agency (IEA) told CNBC on Friday that he believed producers will continue to “pump as much oil as possible.”
“In the post-Doha world, when we’re still in what is essentially a free market for oil, they (the Russians) will pump as much oil out as the market will absorb and the Saudis have said much the same thing,” Atkinson emphasized.”
Atkinson noted “as far as the Russians are concerned, even in the run-up to Doha when they were going to be party to an agreement to freeze production, they were actually pumping up production anyway.”
“The disorderly breakdown in talks on Sunday signals producers are going to start to maximize their export volumes,” Financial Times quoted Bill Farren-Price, head of Petroleum Policy Intelligence, as saying. If that proves correct, the cosy consensus that had been building in the oil market — that supply and demand were finally starting to come into balance — may be threatened.
Analysts at Credit Suisse say that if Opec countries “turn their oil amplifier up” and try to maximize output then the market will not rebalance until 2017 at the earliest. And Fatih Birol, the IEA Executive Director, is also expecting, underlining that the oversupplied oil market could rebalance by next year, as non-Opec production records its biggest decline in a generation.
After meeting Japan’s prime minister, Shinzō Abe, Birol told reporters in Tokyo on Thursday that production outside the Opec was expected to fall sharply this year, by almost 700,000 barrels a day, underlining that markets could rebalance at the turn of this year, or by 2017 at the latest. “This year, we are expecting the biggest decline in non-Opec oil supply in the last 25 years, almost 700,000 barrels per day. At the same time, global demand growth is in a hectic pace.”
He added: “When we look at all the fundamentals – demand, supply and stocks – I have all the reasons to believe that in the absence of a major economic downturn we are going to see balance in the markets latest by 2017.”
All of a sudden the outlook in not too bleak. This is oil business!
