Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18
How to Know If This Stock Market Rally Will Continue for Two More Months? - 14th Jan 18
Everything SMIGGLE from Pencil Cases to Water Bottles, Pens and Springs! - 14th Jan 18
Land Rover Discovery Sport Very Bad MPG Fuel Economy! Real Owner's Review - 14th Jan 18
Gold Miners’ Status Updated - 13th Jan 18
Gold And Silver – Review of Annual, Qrtly, Monthly, Weekly Charts. Reality v Sentiment - 13th Jan 18
Gold GLD ETF Update.. Bear Market Reversal Watch - 13th Jan 18
Stock Market Leadership In 2018 To Come From Oil & Gas - 13th Jan 18
Stock Market Primed for a Reversal - 13th Jan 18
Live Trading Webinar: Discover 3 High-Confidence Trade Set-Ups - 13th Jan 18
Optimum Entry Point for Gold and Silver Stocks - 12th Jan 18
Stock Selloffs Great for Gold - 12th Jan 18
These 3 Facts Show Gold Is Set to Surge in 2018 - 12th Jan 18
How China is Locking Up Critical Resources in the US’s Own Backyard - 12th Jan 18
Stock futures are struggling. May reverse Today - 12th Jan 18
Three Surprising Places You See Cryptocurrency - 12th Jan 18
Semi Seconductor Stocks Canary Still Chirping, But He’s Gonna Croak in 2018 - 12th Jan 18
Land Rover Discovery Sport Panoramic Sunroof Questions Answered - 12th Jan 18
Information About Trading With Alpari And Its Advantages - 12th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

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