The bulls and bears face a continuous tug-of-war as the markets yaw from one side to another. Now-a-days the markets are stable with the continuous instability triggered, sometimes, by the Hurricanes and at times by the increase in inventory levels. The world is also looking forward to 26 September when the top producers of the world meet on the side lines of International Energy Forum in Algiers to decide the future of oil. If from one side the outlook for price seem very strong the fickleness of oil markets do not let one cherish this thought for long.
The past 11 weeks have seen a surge in rig count and there has been an unprecedented increase in refined products. The Cushing Inventory level is also swelled. All this is symptomatic of a weak demand as the OPEC continues to pump oil at record levels and US shale boom doesn’t seem to settle. The same point of view was echoed by IEA’s Oil Market Report for September. The report, which says that “demand has been slowing faster than expected”, had many investors frown. Moreover, despite the fact that one of the major oil producer i.e. Kingdom of Saudi Arabia had its reserves depleted down to $500bn from $700bn and suffering from a budget deficit of $100 billion, still continues to keep their nodding donkeys busy in an effort to vie for market share.
OPEC’s production in August touched an all-time high of 33.47mbpd, 930,000bpd higher than last year. OECD inventories crossed the deadly 3.1 billion barrel mark. Such developments are enough to put kibosh on the ongoing process of market re-balancing. The demand from China and India is reducing. China few months back horded millions of barrels until there storage levels could take no more. Hence, this ebb in demand was quite blatant. Also, China has been, of-late, diversifying its energy investments. The first ever World Energy Investment Report published by IEA has some very inquisitive facts to reveal. China’s investment in renewables-based power capacity surpassed other countries “reaching more than USD 90 billion or over 60% of its total investment in generation in 2015.” This inclination to invest in a kaleidoscopic energy mix is another factor of China’s low demand.
Now to tickle the bear, consider the fact that US shale basins shed 85,000 bpd in September as per the EIA Drilling Productivity Report. Also trillions of dollars of upstream E&P projects have been slashed out putting a check on an ongoing tendency of complacency against supply. Many of the oil savants construe such portents suggesting that the current situation can turn-turtle. To further cement the bullish prognostications consider the fact that the amount of oil discovered in past year was the lowest in 70 years. Moreover, companies are incessantly filing for bankruptcy. As per Oilprice.com Intelligence report, 170 Oil and Gas companies have been declared insolvent. US production has also fallen from 8.7mbpd to 8.4mbpd. A recent news of the development of the biggest onshore oil field i.e. Kashagan, has brought nostalgia from the times when oil was at $100. This project dubbed as “cash all gone” by The Economist is now expected to start in October. ExxonMobil, Eni and Royal Dutch Shell are the joint owners of the projects funding up-to $50bn despite the industry being in doldrums. Italy’s Eni, Total, and China’s CNPC claim that the field will bring 360,000 barrels of black gold in market whereas the Kazakh Energy Minister Kanat Bozumbayev, adopting a moderate tone, considers this amount to be 100,000 b/d next year. Given the unfriendly location of this field and the very fact that it has been the victim of abeyance piling up almost $40bn (the project was started at $10bn) I still doubt its smooth execution.
On Oil Meeting
With all the news we’ve talked about it would be inappropriate to not to discuss the meeting of oil producers to which I alluded in the beginning. When the battle is for market share, the reader should be absolutely clear in his mind that the Middle-eastern oligarchy with KSA as its de-facto leader is not going to succumb at any cost. They have fought gallantly with depleting reserves, lifting subsidies, incensed public and even sacrificed an oil veteran only to take out the high-cost producers out of the game. They will continue to do so as their strategy is proving fruitful (US production has fallen from highs of 9mbpd to 8.4mpbd). Notwithstanding that US rig count is increasing it remains well low than what it was last year.
So this meeting, in which Russian President Mr. Putin , seems quite willing to pen down a deal, will be another wordplay- a ephemeral lull to appease the markets. Production cut is not at all possible for the reasons explained above. Production freeze, when the producers are wringing the earth of every drop of oil, even if happens will be of no utility.
Yes the factors, for instance; KSA’s military assault in Yemen, Iran’s affiliation in Syrian Civil War and Russia being its ally, US also funding different forces in Syria to fight against Assad, can put a pressure making the leaders stoop enough to sign on the deal but the possibility of high-cost producers opting to ‘chicken out’ will be enough to stop them to move their hand.
Given the confounding situation the oil markets is in. The balance we are looking for seems far away than we initially thought.