Syed Rashid Husain
OIL markets continue to oscillate between bullish and bearish sentiments – reacting to conflicting and contradictory reports.
Crude oil futures edged up Friday, building on the week's gains, as traders and analysts eyed US jobs data. US benchmark crude West Texas Intermediate is currently up almost 31% since its February low, and Brent is up 22% in the same stretch.
Contrasting reports continued to hit markets. While US crude inventories rose to a new record of 517.98 million barrels last week, its output fell for a sixth week in a row to 9.08 million barrels a day, the EIA reported. Positive numbers for February payrolls and US jobs data could give further impetus to recovery in oil prices, analysts underlined.
After hitting considerable lows, crude prices began firming up early last week as murmurs spread that markets have finally begun inching out of the bottom. “Oil prices appear to have bottomed out,” Neil Atkinson, the head of IEA’s oil industry and market division, told a seminar in Oslo. “Prices are expected to grow throughout 2016 and into 2017, reflecting expectations that the market is going back into balance in 2017,” he added.
This has been in the backdrop of reports that Saudi Arabia, major Gulf OPEC oil producers, Russia, and several Latin American exporters were closing on a deal to freeze output at January levels. The production freeze option seems to have gained traction among a growing number of producers. Russia, Saudi Arabia, Qatar and Venezuela initially agreed to freeze output at January levels. Later, Ecuador, Algeria, Nigeria, Oman, Kuwait and the United Arab Emirates too expressed readiness to join this initiative. Iran and Iraq though have expressed support to the plan, yet have avoided making any commitment to join the deal.
An Iranian official was quoted by Wall Street Journal as reiterating the country’s position last Tuesday that it would consider oil-production caps only after its output rises back to the levels before sanctions were imposed. Mehran Amirmoeini of the Institute for International Energy Studies, affiliated with Iran’s oil ministry, said Iran may increase oil production by another 500,000 barrels to about 3.9 million barrels per day by August. And only then Iran may consider participating in negotiations with OPEC and Russia (on freezing output), he said.
Yet efforts continue. In order to formalize the output freeze deal, a meeting of oil producing countries will reportedly be held in Russia March 20, Bloomberg reported citing Nigeria’s Oil Ministry. Earlier, Russia’s Energy Minister Alexander Novak too said that his country will agree with OPEC and non-OPEC countries to meet in March to discuss the output freeze deal.
Yet conflicting signals are making the markets confused. After rising in the earlier parts of the week, oil prices eased again on Thursday after ballooning US crude inventories and a lack of any fresh action from the world's largest producer to temper supply snuffed out some of the bullish sentiment that struck the markets last week. US crude inventories rose 10.4 million barrels to a fresh record of 517.98 million barrels last week.
However, not everyone seem to agree that markets had already bottomed. Many felt otherwise. "Prices must fall once again to reach bottom in a way that really shuts down production. I don't think a freeze is the solution," Natixis commodities strategist Abhishek Deshpande said.
"That is the only true way of really turning around prices sustainably and for good...once that happens, there will be a true turning point and, for me, that kind of bottom is still below $25."
Many still seem skeptic of the agreement to freeze output. "We continue to remain wary of possible rallies," said Daniel Ang of brokerage Phillip Futures.
And indeed there are reasons for that.
Even when overproduction ends, a stockpile surplus of more than 1 billion barrels built up since 2014 will remain, weighing on prices, analysts are underlining. Inventories will keep accumulating until the end of 2017, the International Energy Agency is projecting. Clearing the glut could take years.
“We may get to the end of the year, and even though supply and demand are in balance, the market shrugs and says ‘So what?’ because it’s waiting for proof of inventory draw-downs,” said Mike Wittner, head of oil markets at Societe Generale SA in New York. “Moving from stock-builds to balance might not be enough.”
Stockpiles would contract only slowly, analysts are underlining. And precedence already exists. The oil glut that developed in 1998 to 1999, as demand plunged in the wake of the Asian financial crisis, took considerable longer time to balance, Goldman Sachs Group Inc. pointed out in a report. Prices kept falling even as OPEC made output cuts in March and then again in June of 1998, slipping below $10 a barrel in December of that year. It wasn’t until stockpiles in developed economies started dropping in early 1999 that the recovery took shape.
The situation may not be much different today. As per the IEA, between late 2014 and the end of this year, global inventories would swell by about 1.1 billion barrels. Another 37 million could be added in 2017.
“For the previous eight quarters to this one, we have had global implied stock-builds, so we have accumulated a lot of oil,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London was quoted as saying in the international press. “It’s going to take a lot of time to work out that excess oil from the system.”
This is a difficult scenario. Taking the agency’s projections for how quickly inventories will then fall, and estimates from Energy Aspects Ltd. that 290 million barrels will flow into China’s strategic reserves, it will take until 2021 to clear what’s accumulated.
“The market will have a hard time trading higher once supply and demand shift into a deficit as the inventory overhang will likely act as a drag until stock levels are normalized,” Jeff Currie, head of commodities research at Goldman Sachs in New York was quoted as saying.
Market stability could still be some distance away. The current rally may only be a passing phase in an arduous, long and painful process.
