Clam down, calm down .... a small dose of cold realism before Doha? The bulls are not convinced .....

Thursday 14th April 2016

  

Clam down, calm down .... a small dose of cold realism before Doha? The bulls are not convinced .....

ref :- "Oil Extends Losses as U.S. Stockpiles Rise Before Freeze Meeting" , Bloomberg Online

Since we're not around tomorrow, we thought we'd just remind anyone newly arrived from another planet that oil-producing nations (about 15 of them at the last count but it's not set in stone) will meet in Doha this weekend. The aim is to reach agreement on a deal that will freeze production at current levels.

The oil market is always volatile, and traders have been getting particularly excited at the prospect of some kind of cooperation between producers (any kind, in fact). The view being put forward is that a deal will confirm the fact that the ultimate low (below $28 for Brent Crude) has already been established and that it would open the door to more effective deals in the future. If the start of the rally from the lows was bolstered by a wave of short-covering and confirmation that US shale producers are being forced to shut operations with oil still trading at levels well below their break-even price, more recent action reflects optimism about the outcome of the Doha meeting.

Until yesterday that is, and the last 36hrs have seen something of a pull-back in prices. This may have more to do with an EIA report that US inventories rose by 6.6 million barrels last week to yet another post-1930 record than it does with fading hopes for a Doha deal, and as we write we can already see bargain-hunters taking advantage of lower prices to re-enter the market. Their optimism is notable in that there is at least as much that could go wrong in Doha as could go right. Individual producers have paid lip-service to the idea of freezing output levels but most are on record as requiring all others to do the same. Iran has made very plain that it will not countenance any limit on its own production until it has reached its pre-sanction level of 4m barrels per day. At face value, that would seem to rule out any deal there and then. But soothing interventions from the likes of Kuwait have suggested that Iran might be accommodated whilst keeping a lid on GLOBAL output. That of course would mean someone having to give up some of their quota, and it's far from certain who that might be. In these particular circumstances it's hard to see the Saudis and their allies making sacrifices for the sake of Iran. We've talked often about the antagonism between these two so don't propose to go over again here .... suffice to say, and we repeat, there's a lot that could go wrong this weekend.

A Bloomberg survey of 40 analysts reveals that they are evenly split on whether an agreement can be reached. Deal or no deal, we can assume that some bullish noises will come out of the meeting .... well, you wouldn't expect anything else from a collection of wounded producers, would you? That MAY be enough to satisfy those looking for higher prices. But if it all develops into a bun-fight, which is always possible, a nasty little reversal is on the cards. Either way, some sharp moves look likely next week.

Looking at the longer picture for oil prices, the perceived wisdom is that regardless of Doha the latter part of this year will see the current glut drastically reduced and a healthy supply / demand balance restored. What might that mean for prices? Well, higher obviously but how much? Nobody is forecasting a return to the giddy heights of $100 + oil. A level of around $60-70 seems to be many people's idea of a realistic target  --  prices beyond that level would bring US shale producers back into the game in a big way. Far be it from us to disagree with oil industry experts but playing devil's advocate (not again !) , there are some significant variables that could upset such a scenario. Producers both within and outside of OPEC have a long and inglorious history of not sticking to quotas ..... who's to say that this time will be any different? And since there are no plans to actually REDUCE production, for the supply / demand balance to be restored one would have to assume a pretty large increase in demand .... and that, at a time when the IMF is warning of the possibility of global stagnation, is a pretty big assumption in itself.

Still, what do we know?