Too dismissive of oil talks ? Discuss .....

Wednesday 17th February 2016

Too dismissive of oil talks? Discuss .....

ref :- "Iran could decide fate of first global oil deal for 15 years", Reuters online

We'll stick with oil today, since it's the subject at forefront of most minds and influencing most markets. It may not have escaped your notice yesterday  that we were less than entirely convinced that the deal to freeze production agreed in principle between Saudi Arabia and Russia (and of course Qatar and Venezuela) amounted to very much in terms of the huge oversupply problem depressing prices. It is of course perfectly possible that we've just become a bit cynical over the years, although the markets seemed to be of a similar opinion  --  Brent crude was trading about 6% higher before the announcement and finished over 3% lower. Nevertheless, there are a number of talking heads on the financial news channels this morning suggesting that the development is significant in that even if it doesn't address the current oversupply situation, it does help to establish a base for prices and is a first step in building the kind of trust between producers that could lead to actual cuts in production in the future. Mmmmm .... if we were to suggest that most of those reading good things into the agreement are those who stand to benefit most from higher prices, it would only reinforce our cynical credentials .....

Still, what cannot be denied is that there is a new vigour amongst some producers to at least address their problems (and if you look at the dire problems faced by the likes of Venezuela it's no surprise that they are prepared to throw just about everything into brokering a deal). Today, the oil ministers of Iran and Iraq meet in Teheran (along with their Venezuelan and Qatari counterparts, of course). We said yesterday that those first two are absolutely crucial to establishing a deal that might hold, and markets have been marked a little higher again on the fact that they are at least prepared to discuss the situation. What are the chances that they might buy into the idea of freezing production levels, a move that even if it fails to tackle the surplus of oil would almost certainly frighten those with short positions and boost prices (initially)?

Well, as we've said Iraq's production is at record levels and whilst they are desperate for income to rebuild their shattered nation they have suggested that they would consider freezes or even cuts in production IN THE RIGHT CIRCUMSTANCES. And how about Iran ? There's no getting away from it ..... the Iranians are absolutely committed to boosting their production by 1m bpd by year-end to pre-sanction levels  --  that's not just our view, but the words of the Iranian oil minister Bijan Zanganeh. Which of course means that if overall production is to remain the same, or even fall, someone else is going to have to give up a significant slice of their pie. Some may be prepared to, but it's hard to envisage any kind of deal that sees the Saudis handing over market share to the Iranians.

So we remain sceptical, which is not to say that now people are at least talking there isn't a case to be made for suggesting a base may have been found for oil prices. Certainly, it would feel a lot more uncomfortable shorting Brent crude at $33 now than it would have done at the same price in early January, say. But for all the wishful thinking, it should be remembered that the bearish effects of failed talks can be just as dramatic as the bullish effects of successful ones. Perhaps it's a case of wait-and-see .....