Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

The Vienna Deal: Only Temporary Relief in Oil Markets

Commodities / Crude Oil May 29, 2017 - 12:17 PM GMT

By: Dan_Steinbock

Commodities

The Vienna agreement among OPEC and non-OPEC oil producers will extend oil cuts by nine months. After the deal, oil price plummeted by about 5 percent. Far more is needed to subdue new economic uncertainty and market volatility.

Among the oil insiders, the decision to extend oil production cuts was seen as a done deal well before last week's Vienna meeting. But as I have argued in the past few years, investors seek assurances of longer production cuts. That is vital in an era of huge energy overcapacity.


The Vienna outcome is critical to all energy importers. But why is it that oil producers seem to restrict their debates to shorter-term cuts, even though patient capital considers longer-term cuts warranted?

The oil glut of the 2010s

The current oil glut originates from surplus crude oil in 2014–2015. Accelerated in 2016, it was fueled by oversupply as US and Canadian shale oil production reached critical volumes, geopolitical rivalries amongst oil-producing nations, the eclipse of the “commodity super-cycle” due to the deceleration of Chinese growth, and perceived policy efforts away from fossil fuels.

As recently as 2012, the world price of oil was still above $125 per barrel, and remained relatively strong above $100 until September 2014. The sharp downward spiral ensued thereafter as oil price plunged below $30 in January 2016.

Moreover, the production of the Organization of the Petroleum Exporting Countries (OPEC) was poised to rise further with the lifting of international sanctions against Iran, even as markets were oversupplied by 2 million barrels per day.

As the initial OPEC meetings failed to lower the ceiling of oil production, despite great overcapacity, what followed was a deep oil price meltdown. It heralded a new wave of destabilization that contributed to diminished global growth prospects.

In this status quo, the ability and willingness of the 13-member oil cartel to agree on such a ceiling, even on a temporary basis, supports stability while contributing to global growth; at least as long as its OPEC and non-OPEC participants comply fully.

Any new exemption or expanded production volume or ineffective compliance undermines OPEC’s effort to push up prices by extending cuts.

From the first cuts to the Vienna deal

Between August 2016 and February 2017, oil prices increased by 20 percent, mainly thanks to the agreement by the OPEC and other producers to cut oil production. After some weakening, oil prices stood at $50 a barrel at the end of the first quarter, soaring to almost $55 right before the Vienna talks.

Today, Riyadh needs stability to cope with domestic economic challenges, amid its war against Yemen. That's why Saudi Arabia agreed last fall to the first output cut since 2008, accepting a “big hit” on its production, while permitting its regional rival Iran to freeze output at pre-sanctions levels.

Consensus was not automatic. In the past few months, Iran and Iraq, the second- and third-largest OPEC producer respectively, have sought exemption from further production cuts. Following talks, Iraqi Oil Minister Jabbar al-Luaibi and his Iranian counterpart Bijan Zanganeh supported the extension, along the lines of a plan agreed by Saudi Arabia and Russia, the largest OPEC and non-OPEC oil producers, respectively. A bad deal was better than no deal, in which case oil prices would plunge again, which would hurt them even more.

Russia has supported the cuts all along because, in the absence of adequate diversification, Moscow remains dependent on oil revenues. As long as the prices remain steady and on the upside, Russia’s economic growth is secured.

The extension also benefits the United States and the Americas, due to their shale and offshore oil and gas resources.

Inadequate extensions, global pressures

However, as the post-Vienna price declines evidence, the extension is inadequate. The rebalancing of supply and demand is still seen at least some 18 months away, after the buildup of stocks over the past three years.

Even before the Vienna meeting, skeptics thought that oil prices may not exceed $60 in 2017-18 because oil markets are under secular transformation, bargaining power has shifted from advanced economies to emerging nations, and new alternatives (shale, renewable) are capturing more space. Sluggish demand will ensure that further cuts will be needed as prices will remain subdued.

New pressures will ensue. When dollar goes up, oil tends to come down. Oil is denominated in US dollar, which is intertwined with the Fed’s policy rate. As the Fed will continue to hike interest rates that could contribute to further turbulence, particularly in those emerging and developing economies that are amid energy-intensive economic development.

In the short-term, the Vienna extension of production cuts is necessary but not sufficient for a sustained global recovery. Despite abundant inventories and sluggish demand, seasonal demand is likely to rise in the summer in the Middle East, which may make compliance challenging. Stronger US production is likely to delay rebalancing.

Moreover, there are several potential geopolitical storms – the Riyadh-Washington military cooperation but dissension about oil market’s future, the continued need for exemptions by Iran and Iraq and some other major producers, the new normal of oil demand in large emerging economies, the economic implications of President Trump’s pro-Israel policies in the Middle East and so on - that could undermine the ability or the willingness of OPEC and non-OPEC to sustain consensus about production cuts.

Even in the most benign two-year scenario, increasing divisions about production cuts are likely to keep prices relatively subdued for a protracted period. Far more is needed for peaceful, stable and sustained global prospects.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

The original, slightly shorter version was published by South China Morning Post on February 28, 2017

© 2017 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules