Syed Rashid Husain
MARKETS are on edge – reacting to virtually every move. On Friday oil snapped four days of decline, as news came in that Russia was backing the output freeze deal. The US labor market report too helped the rebound.
However, until Thursday, the scenario was relatively grim. Markets were appearing to head to their sharpest weekly fall since the beginning of the year.
This trajectory was but understandable and predictable. Ultimately it’s the fundamentals that dictate the markets. None can deny. Crude fundamentals had continued to remain weak, despite some spikes. Indeed talks of a possible output coordination have helped, yet, it cannot sustain the Bull Run for long – most analysts kept underlining. And they have a point.
The world’s biggest crude consumer is showing signs of demand-supply imbalance. Last Wednesday the US Energy Information Agency reported a 2.3 million-barrel build in US crude stocks, more than double what the market had expected. Inventories of distillates, which include diesel and heating oil, rose nearly 10 times as much as forecast, data showed. Strong dollar, on the back of possibility that Fed may begin hiking interest rates, also adversely hit the crude markets.
Overall global markets too don’t seem to be doing well. The much-trumpeted market balance is yet to herald, with many now stressing that the call was too premature. Market benchmarks actually are reportedly lower today than in May, when the Paris-based, International Energy Agency, the OECD energy watchdog, declared that the balance was starting to return to the market.
By OPEC's estimates, the global demand growth for oil in 2017 is expected to be less than this year. Analysis from S&P Global Platts of recent US data, meanwhile, finds total oil inventories growing by more than 29 million barrels over the past 8 weeks, compared with a buildup of 20 million barrels over the same time last year. The glut is still not gone.
"Given that the United States remains the world's largest consumer and holder of oil, it does not bode well for suggesting that market balance is being achieved," UPI quoted Anthony Starkey, the manager of energy analysis at Platts, as saying. "The high US inventory data suggest oversupply will remain for longer than expected," Hans van Cleef, senior energy economist at ABN AMRO Bank N.V. in Amsterdam was quoted as saying in the press.
Before caving in over the last few days, oil markets were seen firming up, basically on the news that OPEC was getting ready to discuss a possible output freeze. The announcement made the crude markets surge by almost 20 plus percent last month – before it began losing steam.
Yet, the initial market enthusiasm over a possible OPEC output freeze talk seems to have dissipated to a great extent. Speculators entering the market in the hoard, when the OPEC meeting was initially announced, are once again beginning to take a position on sidelines. “Some pessimism over the producer talks – set to take place in Algeria later this month –appears to have crept in despite continued bullish statements from oil ministers,” Thomson Reuters oil analyst Shakil Begg emphasized.
And though, Alexander Novak, Russia’s energy minister plans to attend the International Energy Forum in Algeria on September 26, where some 73 countries accounting for about 90 percent of the global supply and demand for oil and natural gas are expected to be present - Russian enthusiasm for a possible output arrangement appeared questionable - when Novak stressed it might be worth more discussing output freeze if oil prices fell below $50 per barrel. "In my view, current prices at around $50 are normal prices. If prices fall, we can engage more actively in this issue," Novak told the press when asked whether he thought that output restrictions were expedient. Novak’s this comment dampened the market sentiments too. Without Moscow in the tent, a deal is simply not on the table, one could easily deduce.
In the run-up to the ministerial in Algiers, higher OPEC output continues to be an issue. Iraq, which has exported more crude from its southern ports in August, appears poised to continue ramping up output, its oil minister said last week. Saudi output is touching record levels. Iran is not far from its targeted 4 million bpd. Nigeria too seems to be returning to normal – slowly and gradually. A Nigerian militant group has said it has ended attacks on the nation's oil and gas industry that have reduced the OPEC member's output by 700,000 barrels a day to 1.56 million bpd.
Many now feel that OPEC members including Iran and Iraq may not be ultimately ready to curtail their output. At the same time, an OPEC deal could still be undermined if Russia refuses to co-operate in the talks.
Pessimism about the meeting outcome is getting contagious.
However, in a bid to keep the market sentiments alive and kicking until the meeting, the Saudi Foreign Minister Adel Al-Jubeir said on Thursday that OPEC and non-OPEC oil producers were increasingly moving towards a common position. "I think there is a move toward a common position, toward a common effort," he told an event in Tokyo.
"If you want to have an impact then all of us have to shoulder the responsibility, and I believe over the past five or six months, I believe that there has been an increasing realization that this is a collective effort," Al-Jubeir said.
Saudi Energy Minister Khalid Al-Falih in the meantime told Al-Arabiya TV that Riyadh doesn’t intend to boost output to capacity and flood the market. “The market is now saturated with stored crude at beyond usual levels and we don’t see in the near future a need for the kingdom to reach its maximum capacity,” Al-Falih told the network while in Beijing.
But analysts are getting skeptical and not too hopeful of a deal. Immunity to such pronouncements seems to have grown. "There is still lots of correction potential, given the overhang of speculative long positions and exaggerated hopes for an output freeze," Commerzbank oil analyst Carsten Fritsch was quoted as saying.
"Talk is cheap," Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, told Reuters Global Oil Forum. "Reality will set in and the market will realize that the agendas of various OPEC producers are not aligned."
Despite some signs of life on Friday, oil market woes are not over – yet!
