This opinion piece presents the opinions of the author.
Oil prices bounced around following the release of the Energy Information Agency (EIA)’s Weekly Petroleum Status Report, which showed a surprisingly large increase to gasoline inventories of 2 million barrels, but the fourth straight week for a drawdown in U.S. crude stocks.
The choppy trading immediately after the release also reflected confusion and speculation around any possible agreement concerning a production freeze or output cap that was due to come out of an informal meeting of the Organization of the Petroleum Exporting Countries (OPEC) held in Algiers, which concluded today.
Markets were poised to expect a possible decrease to oil inventories after the American Petroleum Institute (API) released, after the market close Tuesday, its estimates for crude and product inventories. For the week ending Sept. 23, the API estimated that crude stocks had fallen by 752,000 barrels, versus expectations for a build of about 3 million barrels. The API also showed that gasoline inventories had fallen by 3.7 million barrels, and distillate inventories (including diesel and heating oil) decreased by 343,000 barrels. The EIA reported that for the week ending Sept. 23, oil inventories fell by 1.9 million barrels and that distillate stocks fell by 1.9 million barrels.
The front-month WTI contract settled up 5.3 percent Wednesday on the NYMEX at $47.05 per barrel, while the Brent front-month contract rose about 6 percent on the ICE to $48.69 per barrel. Oil prices were boosted by comments following the close of the informal OPEC meeting in Algiers that a preliminary agreement had been reached to limit output. Details would be finalized at the next official OPEC meeting in Vienna, scheduled for Nov. 30.
The EIA data, by and large, had a negligible impact as the trading day wore on, and the market trained its focus on the outcome of talks in Algiers. In mid-day trading, oil trended higher off comments from Iran’s oil minister Bijan Zanganeh that indicated the country would consider capping its output at 4 million barrels per day, which would meet a pre-condition to participating in any broader OPEC production freeze or cap.
Since sanctions were lifted in January, Iran has maintained that it would seek to ramp up its production to somewhere between 4 to 4.2 million barrels per day before it would consider adhering to any type of OPEC crude output limit. According to recent data, Iran’s production stands at around 3.6 million barrels per day.
The undeniable fact remains that the fundamentals of the oil market have not materially changed over the past 18 to 24 months. U.S. crude inventories are at historically high levels - at 502.7 million barrels, according to the EIA’s weekly data. In addition, global crude demand is waning, and world oil markets are oversupplied by somewhere around 500,000 barrels per day - and this imbalance could persist until the end of 2017, according to some estimates. Given this fundamental picture, there are very few data points, other than possible OPEC price-stabilizing action, that can catalyze oil prices.
The comments from Iran should seemingly not have supported prices, given that nothing had changed in terms of their unwavering stance to be a party to a freeze agreement with Saudi Arabia and the rest of OPEC. Moreover, of the latest proposals for an OPEC cutback in production, Saudi Arabia’s oil minister Khalid al-Falih had proffered one that implied that Iran’s production would be capped at 3.7 million barrels per day, which was a non-starter to any negotiation.
As evidenced today and in the lead-up to the Algiers meeting, it is apparent that the market is still moved by rhetoric coming from OPEC oil ministers - despite an unimpressive record over the past two years for reaching any agreement among the cartel to stabilize prices. It is becoming increasingly clear that the cartel’s members are using carefully issued statements and discussion in the media around the possibility of a freeze –to keep a floor on prices, but nothing backed by real action.
Cutting through the OPEC freeze or no freeze noise, it is very clear that it is in the best interests of both Saudi Arabia and Iran, two of the biggest influencers of price, to continue pumping oil to their maximum potential in order to gain market share and to shore up government coffers, which have been suffering during the two-year price downturn. For Iran, conditions were exacerbated by international sanctions, which severely restricted the number of buyers of its crude.
On Monday, Saudi Arabia announced a series of public sector pay cuts that would reduce the salaries of government ministers and cap wages, overtime pay, and annual leave for other civil servants. The cuts come alongside Vision 2030, an ambitious program of reforms designed to rein in government spending and make the Kingdom's economy more competitive and diverse and less dependent on oil revenues. The plan does not offer a perfect set of steps to reach the country's goals or an actionable way forward for financial planners. It is more about tightening the social contract between citizens and Saudi leaders while the Kingdom attempts tough financial reforms.
Delia Morris has worked in the international upstream oil & gas industry for over 12 years, and is currently Director, Global Energy Sector at Stratfor, a geopolitical intelligence firm that provides strategic analysis and forecasting services. Please contact Delia at firstname.lastname@example.org
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