A triumph of hope over experience? Oil tries to rally from the lows ......

Monday 18th April 2016

  

A triumph of hope over experience? Oil tries to rally from the lows ......

ref : "Oman Offers to Bridge Saudi - Iran Gap in OIL Output Talks" , Bloomberg Online

No prizes for guessing the lead story this Monday morning ..... the failure of 16 major oil producers to agree a cap on production levels at their meeting in Doha yesterday. Regulars will know that such an outcome did not come as any great surprise to us, and oil prices were marked sharply lower both on Friday when traders began to adjust their expectations about the likelihood of a constructive deal being struck, and in pre-market hours after the news was confirmed. What perhaps is more interesting is that prices are attempting to mount something of a bounce as various leading figures put a positive spin on events in Doha.

But first, what happened over the weekend? Any prospects of  success were always going to hinge on the Saudis being able to accept a rise in Iranian production to pre-sanction levels (4m bpd) whilst everyone else kept output at no higher than current (actually January) levels. Iran was never going to moderate its position and in the event not only did they not send representatives to the meeting but even declined to send observers. The Saudis, whose already tough stance had been noticeably hardening in the run-up to the weekend, predictably refused to set limits on its own production unless Iran did the same. And that, in essence, was that ...... no deal, and presumably the mood music wasn't improved by the Saudis reminding everybody that they could increase their own production by 1m bpd at the drop of a hat.

Nobody will be unaware by now of the intense geopolitical rivalry between Saudi Arabia and Iran that so complicates the chances of them achieving a harmonious working relationship. On that basis alone, in our view a deal over the weekend was never likely -- these guys are not out to do each other favours. But there is an element to Saudi thinking that goes beyond just Iran, and it revolves around the issue of "market-share". You have to remember that it was in order to re-establish its slice of market-share that Saudi Arabia engineered the massive fall in prices in the first place (largely at the expense of US shale producers). In the 1980's the Saudis sacrificed some of their market-share in order to boost prices, and they found it very hard to get it back again. Repeating the policy is just not in their current game-plan, whether it's Iran who picks up the slack or anyone else.

From our point of view, the mystery about the weekend's events is that with such obvious obstacles to a successful outcome a meeting was called before all the ducks were in a row, so to speak. The tough negotiations really should be concluded before such a high-profile gathering and they very plainly weren't. The problem with playing things out under such huge media scrutiny is that if you don't achieve the desired result then the effects can be counterproductive.

Naturally enough in extremely volatile trading oil is sharply lower but we have seen buying interest at the lowest levels, which suggests either that there was some light amidst the gloom or that some positive spinning has hit the mark, depending on your point of view. As you may remember, we always expected some bullish rhetoric whatever the outcome. As it turns out, it takes the form of promoting the view that even if no deal was reached on this occasion, ongoing discussions mean that there is increased hope for progress at the OPEC meeting in June. Frankly, details about why that should be the case are sketchy, apart from the obvious fact that many of the cash-strapped producers are pretty desperate to put something in place that is price-supportive.

Well, of course they are ..... but it'll take something a bit more tangible than offers to mediate for optimism to be convincing, given the fundamental issues that still so obviously need to be solved. Still, that won't stop the speculation and so don't expect any end to the volatility in oil markets that have become the norm.