In a triumph of hope over experience, evidence that hot air can still work ..... for a while

Tuesday 9th August 2016

  

In a triumph of hope over experience, evidence that hot air can still work ..... for a while

ref:- "OPEC Still Faces Same Obstacles to Agree on Oil-Output Limit", Bloomberg Online

If you're as heavy a hitter as Mohammed Al Sada, you'd certainly expect people to listen to what you've got to say ..... he is the President of OPEC, after all. Yesterday he let it be known that OPEC members would be holding talks next month in Algeria, which for some was enough to raise the possibility of production cuts. To suggest that it would be entirely predictable for someone in his position to make comments that could be construed as bullish just as the oil market had re-entered bear-market territory (as it did last week) might be seen as a little over-cynical, but whatever the case his words have had some effect. Brent crude has bounced from recent lows of below $42 to trade above $45 on Mr Al Sada's news.

The argument that this increases the chances of some sort of production limit agreement might a little more convincing if they were coming together specifically for the purpose of discussing that issue, but the fact is that most of the people who matter in the oil game are heading to Algeria anyway for a meeting of the International Energy Forum. Of course there will be talks between members ...... you wouldn't expect them to ignore each other, would you ? Even if you take into account the strained nature of the relationship between the Saudis and the Iranians, the least you would hope for is that discussions will be civil, if not exactly warm.

That's a long way from agreements over production levels however, and according to UBS any speculation in that direction is off the mark. Iran is at the heart of it, and whether their relationships with partners are civil or not, the truth of the matter is that they have not yet regained their pre-sanctions production levels and have made it abundantly clear that they intend to do so before considering any deal. UBS also cited Libya and Nigeria as two more producers operating well below capacity, even if the desperate problems faced by those two are unlikely to be resolved anytime soon. Libya is pumping about a quarter of the crude they were producing at the time of Gaddafi's demise, and Nigeria's rebel-hit infrastructure can only manage a level of output close to the lowest recorded since 1989.

Hopes of a production deal were high before meetings of certain major OPEC members in April and before the group's official June meeting, and on both those occasions those hopes came to nothing. Frankly, there's no tangible reason to see things much differently right now. But more than a few producers are facing severe budget problems with prices (and therefore income) down at these levels, and there's little doubt that Mr Al Sada's comments were designed to provide some support for the market. Gunvor Group point out that the OPEC president has little to lose by pointing analysts towards the possibilities presented by meetings in Algeria ...... if they come to nothing once more, it would be much less damaging than a failed attempt to secure a deal at an official meeting.

Besides, talking the talk without walking the walk CAN work, at least for a while. The April meetings may have been unsuccessful, but they did put a floor under an oversold market, reversed sentiment and prompted a rally from 12-year lows. It looks as though OPEC may be contemplating something similar. It may buy them some time, which they may well need before the much-trumpeted pick-up in demand predicted for the second half of the year comes to the rescue of oil bulls. Mmm ..... we'll wait to see evidence of that but in the wider scheme of things those bulls may have to ponder something else. Depending on who you talk to, somewhere between $50 and $60 lies the point where it becomes viable for US shale producers to start up their rigs once more. Remember, it was to win back market-share from the US that the Saudis opened the taps last time. If we reach the price levels where shale producers are seriously back in the game, it's hard to imagine Saudi Arabia or anyone else being any more accommodating this time round.