 "Did Russia and Saudi give the oil market a lip service?")
When it was least expected Russia and Saudi Arabia, two of the top oil producers pledged to cooperate to stabilise crude oil market.
As the country officials met on the side-lines of G20 meetings, rumours were rife of a possibility of a deal. When it was publicly announced that the two countries will make a joint statement, oil prices shot up by five per cent.
But the announcement failed to live up to market expectation and oil prices retraced a substantial part of the rally on Monday and fell slightly on Tuesday.
Experts did not think much about the joint statement and feel it is nothing more than lip service. Oil markets euphoria did not last long as all the joint statement said was that they would be doing nothing more than setting up a talk shop or joint working group to monitor fundamental indicators on the oil market and develop recommendations on measures and joint actions to guarantee the stability and predictability of the market.
There is very little in the statement here that suggests a production cut to stabilise the markets.
But does the oil market really need a production cut. Despite record level of production by OPEC nations oil prices have refused to fall below $40 per barrel. Despite the global slowdown oil prices have held on to their recent lows and not fallen to the expected level of $20 per barrel.
International Energy Agency recently said that global crude oil supplies continued to outstrip demand. Iran too is pumping oil to reach its pre-sanction levels. This has resulted in record levels of inventory globally. This suggests that an incremental pickup in oil demand will be met through these inventory gains. Even these bearish news flows have failed to push oil prices lower.
The way oil prices are reacting to bearish news flows suggests a temporary bottom has been made, in market parlance it seems that the negative is priced in. Russian and Saudi governments seem to be buying time as global demand slowly picks up to meet supply.
With most of the top producers pumping oil at near full capacity, any incremental demand post the burning of high inventories will lead to a rise in oil prices. There is little scope for oil producers increasing supplies.
Barclays in a report warned that investors are missing the big picture that “a constructive oil market balance is emerging for Q4 2016 and 2017” as global demand grinds higher. The only place where incremental supply can come from is Saudi Arabia, but the country is already pumping oil at record levels and not investing in exploring more oil.
According to Oil columnist Nick Cunningham the IEA and the EIA both estimate that OPEC’s spare capacity has dipped to just 1.4 million barrels per day, about half of what it was a few years ago and extraordinarily low by historical standards. The last time spare capacity was this low, it was between 2004 and 2008, a period of time that saw a dramatic run up in oil prices.
Further, oil industry has discovered the least amount of oil in the last 70 years. Cunningham points out that the industry has also slashed spending by an eye-popping $1 trillion for the period 2015 to 2020, ensuring that the pace of new discoveries will remain unimpressive.
All it would take for the oil market to move higher is oil demand meeting supply. Barclays feels this could be only a few quarters away. Probably Russia and Saudi officials feel the same, thus rather than announcing a cut they bought time in the hope of capitalising in the not so distant future.
