From a month or two there has been a deluge of speculations. Sometimes oil markets reveled and at times tensed. There were “Ayes” and “Nays”. Whenever uncertainty trampled the prices we could see any of the oil producers peddling a “There will be a deal” comment into the news hence striving hard for maintaining the optimism. In these nictitating oil market sentiments, uncertainty lurks everywhere.
There is Russian defection. The Iran and Iranian obstinacy. The Saudi fickleness. All are adding up to the worries. As of today (29th Nov) KSA has proposed a production cut for Iraq and a freeze for Iran. The former has refused and want to freeze and the latter, albeit agreeing to freeze, exceed the ceiling proposed by KSA. They have proposed that Iran freezes at 3.79 million barrels but Tehran says it will not concur to anything less than 3.97 million barrels per day.
The oil prices took a dive Friday (25th Nov) when there was an announcement that fell like a sharp dagger breaking the beautiful picture of a deal into little pieces. I think there has been a sudden realization, a bedazzling epiphany that has put a kibosh (temporarily) on the much awaited November Oil deal.
There has been a ham-fisted attempt at creating a buffoonish illusion. The illusion to make the world buy a production-freeze as a production cut! And the executioner of this oily legerdemain is none other than Russia. It is important here to note that it was Russia’s unconditioned support to a production cut that has been able to drive up the prices from past two months when the party met in Istanbul on the sidelines of International Energy Forum.
In my recent series of articles on this November 30th deal I have always clung to the point that these meetings amount to nothing but a lull to appease the restless markets. The comments serve as a pain-killer for the debt-ridden producers, attrition-smitten and bankrupt oil companies. The recent Trump Triumph is another stock amidst the confounding milieu. His pro-drilling nature and environmental nescience makes many to ponder what effect it will have on the future energy markets. But if we critically analyze it he and his stances are not to affect, at least oil, profoundly. Only the price wields the prowess to change the situation and this bring us to the fundamentals.
The world is still awash with oil. Last time the inventory buildup at Cushing, Oklahoma was termed as “the most bearish report on oil”. However, EIA has provided a little breathing space as it reported a 1.3 million barrel decline in inventory levels at Cushing, Oklahoma for the week November 18. Also, the number of increasing rigs is a continuous worry. This week Baker and Hughes reported an additament of 3 rigs making the total 474 and a week before oil rigs also followed on the heels of Cushing inventory rising by 19, the greatest since July 2015.
The upward tick in prices, whenever it ensues, starts a vicious cycle. As prices aggravate, the nodding donkeys are herded towards the oil fields, resultantly more production, and more supply which, ergo, once again pushes down the supply. There are at-least 5000 DUC wells right now in U.S. if prices rise imagine the deluge. This has been the case from the second half of 2015 and hitherto. And it won’t change either.
Then what is the panacea? It is demand. Unless or until the maw of demand gobbles up the excess supply there is no permanent solution to these predicament. IEA’s Oil market report for November doesn’t helps in this regard. Also the Middle Eastern producers Iran and Iraq are a cause of continuous exasperation as they have not agreed to be a part of any production cut or freeze. Iran says it can freeze their production at 4.2mbpd but the proposition given to them is of 3.2-3.6mbpd. Iraq says it needs to pump in order to have the money to fight IS. Libya and Nigeria has also started to ramp up the production as the attacks in Libya settle down and Niger Delta Avengers have dwindled their strikes. Chinese slow demand is always, once again, a great issue.
With all this being said I opine that KSA will still attend the meeting. But as the current overtures tacitly insinuates. The likelihoods of any deal are very low. What can happen is that there can be a word-play and commitments with hand-shakings and smiles. The chances of even this are also very low. As the days will pass, uncovering the stark reality which was and is always there, the prices will come more down. When they started it was a production cut, then there were few defectors, now it has transmogrified into a freeze and the worse, Russia’s non-participation. These are, certainly, omens that bade ill for the future. These are the signs that show a chronic oil price dip. These signs…are not good.
Let us not be naïve. Let us not be blind. This procrastination. This deliberate defection. This infusion of confusion. To a man cherishing a decent amount of common sense. It clearly indicates: No deal. It seems as it was in a fit of optimism and friendship that OPEC and Non-OPEC producers played with the feelings of the market. No one wants to lose their share. In talks, in news it all sounds and look good. But in reality, in paper, in practice no one wants to do it. This is a bitter truth.