Amid all the hype, the voice of reason belongs to ...... Nigeria

Monday 12th December 2016

Amid all the hype, the voice of reason belongs to ...... Nigeria

ref:- "OPEC's Ideal Price is $60 to Avoid Shale Revival, Nigeria Says", Bloomberg Markets

The major players invited to Vienna by OPEC over the weekend were making all the right noises on Friday, particularly the Russians. It felt as though a deal was in place to secure a 600,000 bpd cut in non-OPEC production with Russia wearing half of the reduced production level (well, as near as makes no difference), and so it proved.

Signposted or not, an OPEC / non-OPEC accord is genuinely newsworthy and oil markets have been in celebratory mood, currently trading about 4.5% higher but having been more than 6% stronger in early trading. Beyond the non-OPEC commitment to lower production was Saudi Arabia's suggestion that it might reduce its own output by more than required by the Nov 30th agreement. Time will tell if this is another case of taking advantage of skittish conditions by "talking" the market higher, but there's no doubt that some traders are pretty excited.

There are plenty calling for West Texas Intermediate crude oil (WTI) to hit $60 this week (Brent crude currently trades at about a $1.80 premium) and $70 or more by mid-2017 is also a genuine prospect for some.

Regulars will know of our belief that expecting all parties to adhere to all agreements is asking a lot of producers in desperate need of of as much income as they can get, and who include some nations whose record at sticking to quotas is distinctly poor. Any quota-busting may take some time to reveal itself however, and the more immediate fly-in-the-ointment for oil bulls may well be US shale-oil producers coming back on stream at an increasing rate once rising prices make it viable once more. The US is not party to any production agreement and given that a prime objective of OPEC's pump-at-will policy begun in 2014 was to put shale-oil producers out of business, its hard to imagine there being much cooperation between the States and others.

This is plainly recognised by Nigeria. While others get overexcited by the oil rally, this OPEC member says that $60 dollars per barrel would be an ideal price as it affords members a decent profit on production whilst even higher prices would see shale-oil producers beginning to flood the market once more.

We applaud Nigeria's common sense, but actually wonder if they're being realistic enough. Many shale producers can make operating profits at less than $60, and as necessity forces technological advances many more will join them. As we said last week, these guys are already hedging future production at $54 / $55 and locking in sufficient profit to keep creditors happy. It may well be that as prices rise, US shale producers will be able to grab back some market share  --  which is exactly what OPEC (led by the Saudis) wanted to take back from them when they started the pump-at-will policy. Are we then back to Square One, except that it's a lower starting point?

No doubt there'll be plenty of wild moves as things sort themselves out, with bulls in the ascendancy as we write. It matters ..... spikes in crude prices have inflationary effects, and these are magnifying the market moves induced by President-elect Trump's intended economic policies. In global bond markets prices are lower and yields higher. The benchmark US 10yr Treasury yield has traded up through 2.50% for the first time in 2 years, and with the German equivalent trading above +0.40 % (for the first time since January), the speculation is that negative bond yields at the longer end in Germany  --  all of a sudden  --  are a thing of the past. 

Of course bond yields can be moved by other things than straightforward economics  --  flights to quality, for example.  And if things shape up in Europe the way they might, who's to say that even a minimally positive-yielding German bund won't look pretty attractive.