Syed Rashid Husain
TOUGH talks are on the cards - with give and take as the norm - when Opec and major non-Opec players meet in Algiers late September to discuss and possibly thrash out a strategy to overcome the current crude market woes.
Already there are signs that the Saudi-led Opec policy of defending the market share has worked. Opec production has risen to its highest on record and supplies outside the group are falling. The US output in the meantime has gone down to almost 8.6 million barrels a day, some one million bpd less than last year.
The stage is thus set for the next move on the global energy chessboard. Opec former president Chakib Khelil feels the group is on course to strike an output-freeze deal with fellow oil producers in Algiers next month because its biggest members are already pumping flat-out.
While a similar initiative failed in April, an agreement can now be reached as Saudi Arabia, Iran, Iraq, and non-member Russia are producing at, or close to, maximum capacity, Khelil said in a Bloomberg Television interview.
“All the conditions are set for an agreement,” Khelil said from Washington. “Probably this is the time because most of the big countries like Russia, Iran, Iraq and Saudi Arabia are reaching their top production level. They have gained all the market share they could gain.”
Khelil had a point. Russian current output hovers near an all-time high of 10.85 million bpd. With Russian output touching new heights, Moscow now seems ready to talk to Opec producers on a possible deal to firm up the oil markets. Russian Energy Minister Alexander Novak underlined his country was ready to discuss the possibility of reaching an oil output freeze deal to further stabilize the global oil market. Novak said his country was consulting with Saudi Arabia and other producers to jointly cap production "if necessary," Arabic newspaper Asharq al-Awsat reported. "We are cooperating in the framework of consultations regarding the oil market with OPEC countries and producers from outside the organization, and are determined to continue the dialogue to achieve market stability," Novak added.
"The idea of freezing oil output, which was discussed in April, has played its role in stabilizing the market. The speculators saw that producers can agree. The door for continuing talks remains open in case such a need emerges," Novak told the newspaper.
In the meantime, Saudi Arabia has also hiked its output. As per Opec, the Saudi output is continuing to increase, reaching a record 10.67million bpd last month. A Saudi hike in production ahead of any talks could give the kingdom more room to maneuver.
And as per a Reuters report, Saudi Arabia could boost crude output even further in August to somewhere around 10.8-10.9 million barrels per day.
The kingdom seems pushing hard to maintain its export market share in core regions — such as Asia — where it sees growing competition from rivals such as Iran, Iraq, and Russia. Earlier this month it cut its prices for the benchmark crude grade it sells into Asia.
Iran although is not committed to the new round of talks, yet, the fact is that Iran is also now close to it’s targeted output of around 4 million bpd. This gives credence to speculation that Tehran might ultimately join. Iran has previously resisted capping its output until it reached pre-sanction output levels of between 4 million and 4.2 million bpd.
Iran is not far from that. It has raised its production to 3.850 million bpd now from 3.37 million bpd in January. Yet the gap is there. And Iran is not committed - yet. Iran’s oil minister Bijan Zangeneh said on Thursday he had not decided if he would attend September’s gathering. A spokeswoman for Iran’s oil ministry also said earlier that the country has not decided whether to join next month’s meeting.
Iran's non-commitment, as yet, has raised some questions. “Iran will remain a stumbling block as it simply cannot accept a ceiling on its production,” says Amrita Sen, chief analyst at London-based consultancy Energy Aspects.
Emmanuel Ibe Kachikwu, Nigeria’s oil minister told CNN this week that he was “not optimistic” about any production cuts in September. “We’ve tried that a couple of times and I think we’ve not been able to get the unity we need.”
Yet, the very talk of action has helped push up the markets. Since hitting summer lows of $41.80 on August 2, Brent has rallied over 22pc to highs of over $51 a barrel on Friday. Weakening US dollar also seemed helping the crude cause. The WSJ Dollar Index, which measures the dollar against a basket of currencies, recently has fallen. And since oil is traded in dollars, a weaker dollar can make the commodity cheaper for traders who use other currencies.
Data showing drops in US crude and gasoline stockpiles are also continuing to ease fears of a glut and push bearish traders out of the market. The US Energy Information Administration reported last week that US crude stocks shrank by 2.7 million barrels last week while gasoline stocks fell by 2.2 million barrels.
“Seeing gasoline stocks in the US decline solidly three weeks in a row has taken out some of the bearish pressure in the market and on top of that you have these Opec freeze discussions,” said Bjarne Schieldrop, chief commodities analyst at SEB Markets.
Consequent to all this, traders are now seen scrambling out of the bearish, or short, positions. This process requires them to buy back contracts and often leads to quick, sharp price increases. “When you post up a record short position of that size, the resulting unwinding tends to be rather dramatic,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. “The Opec headlines are the spark that’s feeding the fire.”
Yet, many are still ready to bet that the current scenario is a phase in passing. “The overhang is still very much there,” Alex Poon, vice president of a Hong Kong-based brokerage firm underlined.
"We've gained too much in too little a time, at least technically, and I think this rally has to stop," Donald Morton of Herbert J. Sims & Co, an investment banking house in Fairfield, Connecticut, said.
Analysts feel oil could take another leg down during refining maintenance season, between late August and October. Refinery demand for crude drops as refiners shut down in the preparation of winter fuel production.
Despite the bullish mood, markets could be in for another downturn, one could hence say with some conviction.
