Crude Oil Market Updates

In Doha, Major Oil Exporters Fail to Agree on Production Freeze
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​DOHA, Qatar- Officials from 18 oil-producing nations failed on Sunday, April 17, 2016 to reach a deal to freeze oil production at current levels.
 
The meeting of officials, representing most of the Organization of the Petroleum Exporting Countries as well as Russia had been intended to calm the market and convince them that the two leading oil exporters, Russia and Saudi Arabia, were cooperating. But with officials coming up short on Sunday, the meeting may end up being a blow to confidence that could send oil prices tumbling.
 
A sharp fall in oil prices could also feed into equity prices, which have recently tended to rise and fall along with oil prices.
 
Oil fell sharply in early trading on Monday in Asia, at one point dropping nearly 6 percent to fall below $38 a barrel. Asian stock markets were mixed. Japanese shares were down nearly 3 percent in morning trading, but stocks across the rest of Asia saw more modest declines. Markets in Shanghai and Hong Kong opened around 1percent lower.
 
"There will be a lot of people who they have disappointed," said Bill Farren­Price, chief executive of Petroleum Policy Intelligence, a British firm that advises hedge funds and other businesses on the oil markets. The oil exporters, he said, "raised expectations."
 
A major stumbling block in the talks appears to have been pressure from Saudi Arabia for Iran to participate in the freeze, a measure to address the current global oversupply of oil. The Iranians, who are rapidly increasing production after the end of most sanctions over their nuclear program, have refused to cap production at current low levels.
 
The oil producers seemed to head into the meeting full of confidence that a deal to stabilize oil markets could be reached. In fact, a draft agreement calling for a freeze at January levels through October was circulated Saturday.
 
Talk of a potential freeze had already helped lift the oil markets from their January lows below $30 per barrel to about $43 per barrel for Brent crude. "I think at least the discussion and expectations around the Doha meeting have contributed to higher prices," Eric Lascelles, chief economist at RBC Global Asset Management, said in an interview before the meeting.
 
A deal was unlikely to quickly change the amount of oil on the market because most participants in the freeze were pumping at high levels.  And the failure is unlikely to have much of an impact on supply and demand balances.
 
What might limit the reaction is a strike on Sunday by Kuwaiti oil workers. That has cut into the country's oil production by what appears to be a substantial amount. "You would expect the market to sell off but the downside might be limited," said Mr. Farren-Price, who was observing the Doha meeting.
 
Analysts on Sunday also raised the question of how Saudi Arabia and the other countries could have scheduled the meeting if they knew it was doomed to failure.  After all, the idea was to calm the markets, not roil them.
 
"This implies really poor communication by the lead members of the group," particularly Saudi Arabia and Russia, said Richard Mallinson, an oil analyst at Energy Aspects, a London-based market research firm. ''Why even schedule this meeting if you did not have a compromise agreed over Iran”
 
The idea of a freeze in production emerged in February, after oil prices plunged below $30 per barrel. OPEC members had been unable to agree on production cuts to manage the market. Instead, most members pumped oil at full capacity, trying to maximize revenues in the face of falling prices.
 
Saudi Arabia, Russia, Qatar and Venezuela agreed in principle on a freeze at a meeting in February, but made it contingent on participation by other major producers. The idea of a freeze gained favor because it would involve little or no sacrifice for anyone.
 
Analysts and some OPEC officials thought that a way could be found to accommodate Iran's desire to make up ground lost under sanctions.
 
Either they misread the Saudis or the kingdom’s leadership hardened its position.  Saudi Arabia and Iran are bitter rivals in the Middle East, clashing over Yemen and Syria.  The competition increasingly extends to oil, where a resurgent Iran is vying with the Saudis for market share among customers in Asia and Europe.
 
In the days before this meeting, a mixed message emerged from Saudi Arabia. Its oil officials, led by Ali al-Naimi, an 80-year-old veteran oil minister, evidently sought accommodation with other big producers, including Iran, while, the deputy crown prince, Mohammed bin Salman, who has become the kingdom's chief policy maker, indicated  that Saudi Arabia might not go along with a freeze if Iran did not also comply.
 
"If all major producers don't freeze production, we will not freeze production," Prince Mohammed told Bloomberg News recently.
 
The deal was scuppered by Saudi Arabia's insistence that language requiring that all OPEC members participate in the freeze be inserted in the draft. There was little question that Iran, which was not represented at the meeting, would agree. After lengthy negotiations among Saudi Arabia, Russia, Venezuela and Qatar, which convened the meeting, the talks broke up on Sunday.
 
"The meeting concluded that we all need time for further consultation," Qatar's energy minister, Mohammed al-Sada, said at a news conference. He said that "participating countries would consult among themselves and with others" until the next OPEC meeting, which is scheduled for June in Vienna.
 
Saudi tactics on the freeze appear to be a part of a shift in the kingdom's oil policy, analysts say.
 
The Saudis, analysts say, increasingly seem to accept that they can no longer control oil prices through OPEC, in part because the huge increases in supply from the United States in recent years have undercut OPEC's leverage.
 
"This is the new world of oil," said Jim Burkhard, head of oil markets and scenarios research at IHS, who was also observing the meeting. "The oil market is a reflection of the world. Power is more decentralized."
 
The Saudis are shifting instead toward producing whatever oil they need to supply their growing network of domestic refineries and petrochemical plants and their expanding body of overseas customers.
 
Prince Mohammed, who has authority over the Saudi oil industry, warned that the kingdom could increase production by a million barrels per day in the coming months if it chose.
 
With low production costs, estimated at $3.50 to $5 per barrel, Saudi Arabia can compete on price with any producer.  So can Russia, which can produce oil for about $4 per barrel, according to IHS.  While Saudi Arabia and its Persian Gulf allies, Kuwait and the United Arab Emirates, are feeling the pinch of lower revenues, they are in far less immediate trouble than OPEC members like Venezuela and Algeria, analysts say.
 
Some of the less well-off oil producers clearly wanted a deal in hopes that it would raise prices and revenues.  "This is something that affects the whole oil industry whether you are in OPEC or not," Ecuador’s oil minister, Carlos Pareja Yannuzzelli, told reporters on Sunday.
 
 
While plans are far from fully delineated, Prince Mohammed appears to be charting a more independent course for the Saudi oil industry.  For instance, he has said he plans a public listing of the national oil company, Saudi Aramco, the world's largest oil-producing company.  A public listing might require the company to pay more attention to the requirements of outside investors than to other OPEC members.
 
Prince Mohammed increasingly seems to see oil as a potential political instrument-an approach that Mr.Naimi eschewed.
 
"There is a lot of change happening in Riyadh," Mr. Mallinson said. Oil policy is becoming "less insulated from politics."
 
Some analysts speculate that Mr. Naimi -who has long been skeptical that other producers, including Russia, would honor production ceilings -is going along with the idea of a freeze to help insulate Saudi Arabia from criticism.
 
The Saudis might have been "covering their backs," said Paul Stevens, an analyst at Chatham House, a London-based research firm. "They can say, we tried.'"
 
Russia had reason to go along with a freeze. Russia's economy, which depends heavily on oil revenues, is in recession. The Kremlin's desperation for higher prices is palpable; the country is committed to two wars, in Ukraine and Syria. At home, wages are being cut, bringing signs of social unrest ahead of a parliamentary election in September.
 
Russia's energy minister, Alexander Novak, who attended the Doha meeting, has been a crucial supporter of a freeze. A role assigned to Mr. Novak was to bring in Iran, but he has failed so far.
 
Russia and Saudi Arabia trade places for the top spot among oil producers. Russia has been in the lead of late, pumping 10.9 million barrels of oil a day in January compared with Saudi Arabia's 10.2 million. But because of Russia's larger population and industrial base, it consumes more oil at home, leaving Saudi Arabia the leader in exports.
 
Since the Soviet period, OPEC has looked on Russia as a freeloader on price-boosting production cuts: Russia benefited but never joined in.
 
Analysts say that OPEC's efforts to involve Russia and other outsiders underlines its diminished clout.  Joining with Russia is "what is left for an organization that has lost its core reason for being, at least for now and possibly for the longer term," said Bhushan Bahree, an OPEC analyst at the market research firm IHS, who was observing the meeting.
 
 
Source:  New York Time

Analysis by Oil Price

The Doha talks collapsed over the weekend as Saudi Arabia refused to sign on to the production freeze agreement without Iran. The events were bizarre and completely defied everyone’s expectations for the summit. OPEC would have been better off if it had never agreed to stage the negotiations to begin with. 

Saudi Arabia backed away from the Doha talks after Iran refused to sign on. But Iran was never going to agree, so it seemed odd that Saudi Arabia tentatively agreed to a production freeze deal heading into the Doha negotiations, only to back out at the last second. Other participants, including Russia and Venezuela, had thought they were traveling to Doha to sign a deal that would be merely a formality not a debate. They certainly did not think that the meeting would end in failure. 

Saudi Arabia’s hostility towards Iran was in full view as it appears that the Saudi government was willing to scuttle a very weak agreement that would involve almost no sacrifice simply to avoid handing Iran a victory through modestly higher oil prices. OPEC’s official announcement was that they needed more time to discuss the agreement and would reconvene at its normally scheduled meeting in Vienna in June. 

A failure or a victory for Saudi Arabia? The collapse of the talks illustrate the discord within the cartel, and it is hard to imagine the group taking any controversial decisions together. With Saudi Arabia once again sticking to its strategy of pursuing market share, all OPEC members are more or less left to fend for themselves. On the one hand, this leaves OPEC’s credibility in tatters. On the other, since 2014, the Saudis have put a much higher priority on the strategy to fight for market share and push out high-cost oil production around the world. OPEC’s credibility has been less important. In that sense, Saudi Arabia is not exactly upset to see Doha fall apart. While all OPEC members could be hurt from low oil prices in the interim, the real victims will be U.S. shale companies will continue to bear the brunt of the market “rebalancing,” a process that is gradual but already well underway. Why save U.S. shale now? Saudi Arabia will emerge from the oil bust with its market share intact.

Shift in balance of power in Riyadh. One other interesting wrinkle is that the young Deputy Crown Prince Mohammed bin Salman seems to have impressed his will upon Saudi policy. For years, Saudi Arabia’s oil minister Ali al-Naimi orchestrated Saudi oil strategy. Diplomatic and well-liked in western circles, al-Naimi rarely sprung surprises during negotiations. But Saudi Arabia’s actions over the past few days suggest that the Deputy Crown Prince now has more power, and his hostility towards Iran trumped his country’s oil strategy. 

Kuwait oil offline. The markets largely shrugged off the Doha failure because more important events were transpiring in Kuwait. A strike by the country’s oil workers knocked nearly 2 million barrels of daily oil production offline. Kuwait’s state-owned company said that production fell from its normal 3 mb/d to just 1.1 mb/d over the weekend. That is a massive drop off, and will have an infinitely larger impact on the oil markets than any OPEC production freeze. The government has ordered the company to replace its striking workers, but it remains to be seen how quickly production can come back. 

Brazil’s lower house votes to impeach President Rousseff. On Sunday, Brazil’s Chamber of Deputies voted 367 to 137 to proceed with impeachment charges for President Dilma Rousseff. The Senate will vote in the next few days on whether to proceed, which could result in the President standing trial. The President is now hugely unpopular, but the issue is complex. The politicians leading the impeachment proceedings, led by House Speaker Eduardo Cunha, are also implicated in corruption. Cunha has already been hit with corruption charges, pocketing millions of dollars as part of the Petrobras scandal. He and the opposition are exploiting discontent within Brazil, and despite his own baggage, the opposition looks increasingly likely to prevail over the president. The Brazilian stock market moved up on the news. 

Saudi Arabia threatens U.S. on 9/11 bill. Saudi Arabia said that it would sell off $750 billion in U.S. treasuries and other American assets if the U.S. Congress passes a bill under consideration that would allow the Saudi government to be held responsible for any role it might have played in the 9/11 attacks. But economists argue that Saudi Arabia probably couldn’t pull off such sale of assets, which could cripple the Saudi economy. Al the same, the White House has pressed Congress to kill the bill. President Obama is set to visit Saudi Arabia this week. 

We invite you to read several of the most pertinent articles we have researched which may be of interest to you:

• Saudi Arabia Kills Doha Deal, Talks Fall Apart
• 200M Barrels Of Oil Sit In Idle Tankers Waiting To Unload At Chinese Ports
• Canada’s Oil Industry To See 62% Decline In Investment
• This Is How Oilfield Services Are Surviving Low Oil Prices

Source:  Oil Price


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