As we move closer towards 17 April, the day on which international oil producers have agreed to meet, conjecture mounts with views ranging from bearish to bullish. No doubt depending upon what outcome is hoped for.
Earlier in the year, there was a ground breaking meeting at which Saudi Arabia and Russia not only met but also discussed the world oil glut and gave the impression that they would like to act to see the market re-balanced in their favour. However, as often happens, neither party was willing to give way and the outcome of this event was that the two major producers, who are also direct competitors to each other, would freeze their respective output levels at maximum point. How this was interpreted as “bullish” is hard to understand as, in theory, neither could easily increase beyond these levels anyway and therefore to continue production at these levels would simply add to the current supply surplus. Nevertheless, it was an agreement which fired up the market and, in the hope of more to come, the OPEC Basket oil price has risen from a low of $22.48 in January to $38.62 today and over the same period the price of Brent Crude has risen from just over $30 to around $44 today. Yet, nothing has really changed!
Whenever OPEC has met and agreed a cut in output, it has always been down to Saudi Arabia to implement it and this is the issue for Saudi. Once any such announcement it made, the price of oil rises and Saudi may cut but other OPEC members will sneak in, cash in, and cost Saudi market share. With sanctions having been imposed on Iran, Iran has lost market share and some of this has been to the benefit of Saudi. Today, with sanctions lifted, Iran is keen to retain lost share and export another 1.2mbpd in to the market. Once that has been achieved, Iran will consider an output freeze, presumably at the maximum output level. Saudi does not want to give up that volume and therefore has made it absolutely clear that it will not agree to a cut in output at this point.
The Doha meeting will include OPEC and non-OPEC producers although Iran has said that its Minister will not attend so, presumably, an official will be there to monitor discussions. Russia will attend but Russia does not have a track record of working with other producers. The kind of production that it has does not lend itself to varying output and furthermore, as the country is totally dependent on revenue from oil and gas, it is unlikely to agree to cut. So, Saudi and Russia will not cut and Iran will not cap output at its current level while the US, who’s increased output in to the market in recent years has contributed to the surplus, is not scheduled to attend the meeting anyway. Similarly, Iraq is planning to increase its output and is not offering to give way either while Libya, torn apart by civil strife, could offer another 1mbpd if ever peace returns to the country. As a consequence, it is unlikely that a meaningful outcome will be achieved in Doha this weekend.
Looking ahead to the OPEC Meeting in June, delegates will obviously be encouraged that some level of dialogue has been set up within the global market although a solution to the surplus has not been achieved. However, the lower prices over the last year have resulted in a dramatic decline in the US rig count from over 1,800 in 2015 to around 350 today and, in true support of the Doha meeting, the US EIA has published its Short-Term outlook in which it states that U.S. crude oil production averaged an estimated 9.4 million barrels per day (b/d) in 2015 but will fall to 8.6 million b/d in 2016 and 8.0 million b/d in 2017. Furthermore, oil production in March 2016 averaged 9.0 million b/d, 90,000 b/d below the February 2016 level. So, there are signs that the Saudi strategy is working and the major catalyst in the market is losing its influence. This is what Saudi was planning on, and with the market price below $50, US production will not return, but, should it recover to $60, then it may well be back with a vengeance.