A spirited oil rally barely extended to a fourth consecutive day on Thursday, as Iran appeared to be cool to a Saudi-Russia proposal to freeze output.
Saudi Arabia and Russia agree to freeze oil output, but deal ‘not worth much’ without Iran, Iraq
Saudi Arabia and Russia, the world’s two largest crude producers, decided to freeze output after talks in Qatar.
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Crude oil prices have rallied more than 14 per cent since Saudi Arabia, Russia – two world’s largest oil producers – together with Venezuela, Iraq and Qatar, unveiled plans to maintain their production to levels reported in January, provided other major OPEC and non-OPEC producers joined in. On Thursday, U.S. crude managed to eke out an increase of just US11 cents to US$30.77 per barrel, climbing down from its peak of US$31.98, after the producers’ meeting in Tehran yielded no alternation in supply outlook and traders fretted over rising U.S. inventories.
But Citibank analysts were built with a succinct warning about the rally: Oil bulls are “clutching at straws,” they said.
“The market clearly wants to see some indications of life in OPEC, but we believe bulls (in other words producers fearful of further price falls) are likely to be better served” by focusing on summer time outlook for gasoline, Citibank analyst Seth Kleinman said inside a note Thursday.
Iran’s buy-in is essential for a meaningful pact because the country is poised to create between 500,000 to one million barrels per day of oil towards the market within the next 12 months after global powers lifted sanctions around the country earlier this year.
Market speculation was that Iran would be offered a cap of 300,000 bpd above its current levels.
“That it was insufficient speaks with the idea to Iran’s confidence that it can exceed that number this season, in order to the breakdown in inter-OPEC relations, or both,” Kleinman said.
Iran argues OPEC members for example Saudi Arabia and Iraq exceeded their quota to make up for Iran’s sanction-induced production decline over the past 4 years, plus they should be the ones rolling back to make method for Iran.
“If there’s a will between Saudi Arabia and Russia to manage the market, it (the freeze) is going to happen,” says Sara Vakhshouri, a Washington-based analyst who once helped the National Iranian Oil Company. “But if they are awaiting Iran, it’s not a rational decision.”
The Big Freeze pact between major producers is in itself a half-hearted attempt to manage markets, because the five countries have collectively raised their production by nearly 2 million bpd since the second quarter of 2014, data from the International Energy Agency shows.
The pact would have little impact on prices as the countries are freezing, not cutting, output, said Omar Al-Ubaydli, a Bahrain-based analyst.
“All the Saudis are doing is showing the planet, and their internal constituents, that the rest of the world can not be trusted and, sure enough, Iran didn’t waste any time,” said Al-Ubaydli, a senior affiliated research fellow using the Arlington-based George Mason University.
A couple of months from now, look for Russian President Vladimir Putin to assert he can’t control Russian oil firms because they are private companies.
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“There is little history of collaboration, truth to be told,” Al-Ubaydli said, talking about Russia’s decision to break its pact with OPEC in 1999.
Patricia Mohr, analyst with Scotiabank, believes OPEC and Russia will most likely need to cut production, even when world demand advances in a healthy 1.8 per cent clip in 2016 and U.S. production is cut modestly.
Rather than searching for meaning in OPEC’s pronouncements, investors be more effective off looking at gasoline futures to obtain a better feeling of oil’s trajectory, analysts say.
“Recent U.S. and Chinese data have dampened expectations of gasoline demand development in 2016, amidst a back-drop of negative economic sentiment, but vehicle sales growth gives some reason for continued optimism,” Kleinman noted.
A U.S. crude surge was cut short Thursday after official U.S. data showed crude inventories rose for an 86-year a lot of 504 million barrels, up 2.1 million barrels last week.
While OPEC’s latest effort can be a false dawn for oil, it signals the group’s intention to react to price declines, which, would likely discourage shorting of oil futures.
As almost as much ast 5.5 million bpd of oil is working at negative cash margins, according to Sprott Asset Management LP, suggesting that current prices are unsustainable for many high-cost producers.
“Prices weren’t rising due to the OPEC rumour, prices happen to be rising as it is becoming more evident output will begin to decrease forcibly,” Al-Ubaydli said.
An easing off the U.S. dollar, which has deflated commodity prices since mid-2014, can also be necessary for a sustainable recovery in oil.
“Relief from this (U.S. dollar) strength – perhaps triggered with a delay in further Fed funds rate hikes this year – would help to lift oil prices,” said Mohr.
yhussain@nationalpost.com
Twitter.com/YAD_FPEnergy
