ANALYSIS
Battered oil markets perked up on faint hopes that OPEC may convince rival Russia to orchestrate a production cut and rein inside a supply glut.
Oil traders shunned news of weak economic data from China and a World Bank oil price forecast downgrade, taking oil past US$31 per barrel after OPEC secretary-general Abdullah al-Badri said “it is crucial that all major producers sit down and are available up with an answer.”
Markets were also buoyed by Iraq oil minister Adel Abdel Mahdi suggesting that he “saw more flexibility” on the deal from Saudi Arabia and Russia. U.S. crude shot up 3.7 percent, at US$31.45 per barrel.
But some long-time OPEC watchers shrugged off the latest pronouncements as only cheap talk.
“I don’t believe them would actually be prepared to cut whether it dropped into it,” Thomas Pugh, commodities economist at London-based Capital Economic said in an interview. “The issue is all of them want somebody else to chop.”
Julian Lee, an analyst at Bloomberg, said in a note to clients: “Don’t get too excited about talk of oil output cuts.”
Since November 2014, OPEC, led by Saudi Arabia, has increased output to drive prices down and squeeze out more expensive non-OPEC producers. Wood Mackenzie estimates projects worth US$380 billion mostly in non-OPEC countries happen to be axed as oil prices have shed 72 per cent since their peak in July 2014.
Even OPEC members aren’t spared with the group’s collective revenues from oil receipts declining by up to 50 % to US$380 billion last year when compared with 2014, based on the U.S. United states doe estimates.
Cash-strapped Venezuela reportedly sought an urgent situation OPEC meeting recently to discuss output cuts, but its appeal was rejected.
A deal is not likely, as Saudi Arabia – the only OPEC country that matters inside a cut – and Russia don’t see eye to eye on most issues. Riyadh and Moscow actively compete with one another in Asian and European markets, and also the two are also on opposite sides of the political stalemate in Syria.
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Saudi Arabia has maintained it might cut production only when others agree to a cut, while Russian officials have repeatedly suggested that the artificial cut would be ineffective.
But Helima Croft, global head of commodity strategy at RBC Capital Markets LLC, said Russia might be changing its tune.
“The path to a cut goes through Moscow,” Croft said, noting that there happen to be low-level economic protests in Russia that may make President Vladimir Putin nervous.
“Russia is vitally important to look at. If Putin decides the economic cost of not co-operating are extremely high, then it will be a potential catalyst for any real reversal in OPEC’s decision.
“I don’t see Saudi reversing course unless they can say they maintained the principle that OPEC didn’t cut alone.”
Putin also reportedly asked Syrian president Bashar Al Assad to step down, which Croft said could be the beginning of a rapprochement with Saudi Arabia, who opposes the Syrian leader.
Russia might be softening, however the Saudis haven’t yet indicated a shift in strategy.
“Demand will grow, as it has already were only available in 2015, and there will be a period not far in to the future (when) demand will meet up with supply,” Khalid al-Falih, chairman of state oil firm Aramco told reporters on Tuesday.
The stalemate likely means oil prices will stay volatile within the interim.
“They might use the high US$20s and than the late US$30s for a short time, depending on exactly what the story of the day is,” Pugh said.
Global oil producers stay in the grip of the most severe downturn in a generation. Almost three-fourths of the 900 respondents surveyed by Norwegian consultancy DNV-GL said they were preparing their company for a sustained period of low oil prices, and more than four in ten believed that oil prices would not increase in 2016.
“It is anticipated that capital spending will decrease across the sector in general: 51 percent said that their company’s capital investment will decline in 2016,” the DNV-GL said in a report Monday.
Meanwhile, the World Bank piled on to the gloom Tuesday, lowering crude oil forecast for 2016 to USD37 per barrel, from USD51 per barrel in the October forecast.
yhussain@nationalpost.com
Twitter.com/YAD_FPEnergy
