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Saudi Arabia Ruined the Oil Summit – but Failed to Bring Down Oil

by | published April 19th, 2016

The failure of the world’s main exporters to reach an agreement to freeze production on Sunday in Doha resulted in a dive in prices…

For a few hours.

West Texas Intermediate (WTI, the benchmark used in New York) closed down 1.4% yesterday, while Dated Brent (the globally used equivalent set in London) gave up less than 0.8%.

And as of 11:00 a.m. Eastern today, WTI is up 3.5% (to over $41 a barrel) and Brent has gained over 3% (to more than $44).

If ever there was a “non-event,” the supposed “fallout” from this past weekend’s meetings certainly appears to be one of them.

In fact, this is what you’d expect from a successful Doha meeting, not from a failure.

Even so, some pundits are now saying that Saudi Arabia, Iran, and others will be increasing production after Doha.

They won’t – and the market knows this, as oil prices are rising, not falling.

Here’s why…

Kuwait is (Unintentionally) Cutting Production On Its Own

The short-term reason for rising oil prices despite the disappointment from Doha is Kuwait.

Because of an oil workers’ strike now in its third day, Kuwaiti oil production has been cut from 2.8 million barrels a day to about 1.5 million.

In short, oil prices are rising because supply was suddenly cut short.

Now, the strike in Kuwait will be resolved shortly, and the country’s production will be coming back onto the market.

But remember, for a long-term rise in oil prices all we needed from Doha was recognition among oil traders that a price floor was forming. That can be accomplished by setting a ceiling on overall production or by traders forming an expectation about the effective price range of oil, given rising global demand and large recoverable oil reserves.

An accord at Doha would have accomplished the floor through the former mechanism. That failed.

But the market has now done it on its own, using the second approach.

Now, the effect of the Kuwaiti strike has been tempered even more by indications from Iran that the country will be able to reach its targeted production levels by the end of June. Tehran’s decision not to attend the Doha meeting combined with OPEC leader Saudi Arabia’s insistence that all OPEC members agree to the cap guaranteed that the deal fell through.

Keep in mind that since the lifting of Western sanctions against Iran last year, the Islamic Republic has struggled to increase its production to pre-sanction levels. And while they will ramp up production somewhat, and some of that additional oil will be exported, much of this is bluster.

Despite what Tehran says, their ability to sustain maximum production and translate that into exports is highly debatable (as you’ve seen me mention before).

Which brings us to the main non-OPEC country that attended the Doha meeting…

Russia’s Threats are Empty

According to several ministerial contacts this morning, Moscow will now ramp up production in response to the apparent collapse of the Doha deal.

This is bravado, and signifies little of consequence, for two reasons.

First, Russian production is straining the upper limits of what the country’s oil fields can produce now, and a decline is coming shortly as primary basins mature (as you saw earlier here in Oil & Energy Investor).

January’s daily total production of above 10 million barrels a day – the number that Doha negotiations were to set the cap at – is not a level that Moscow can keep up on a consistent basis.

Second, the only way Russia can secure additional export volume is by crowding out other producers. But end users will only abandon existing contracts if they’re offered a better deal.

That guarantees a pricing war and a rapidly declining revenue flow even if Moscow does gain that volume. And that’s hardly what Russia wants at this point, as its central budget is a mess, and low oil prices mean that it’s deteriorating fast.

In fact, the same can be said for other OPEC members…

Oil Production Will Not be Increasing

Some so-called pundits are now suggesting that all producers will open the taps and flood the market.

But that is in no one’s interest. Given that January’s aggregate production figures in practice work as a ceiling (because few producers can exceed, let alone sustain, those levels), this is all just bluster and threats.

So that’s where we are on the other side of the Doha “non-event.”

The oil market is moving toward a balance even though excess production possible – and it’s doing so without Doha.

Recall that when WTI prices were well above $100 a barrel back in 2014, we had a larger surplus of supply at Cushing, OK (the main pipeline exchange in the country and the location where the daily WTI price is fixed) than we do now.

The reason is simple. The issue is not that there’s a surplus of oil.

Rather, the issue is the recognition that there is excess extractable supply in the ground and easily retrievable.

And with the market apparently realizing that not all of that will be coming to market soon, the consensus among oil analysts is now that crude oil prices will be moving up into the high $50s by the end of the year.

I retain my estimates of $42-$45 WTI and $48-$50 Brent by mid-June. We are effectively there already, although expect some volatility to move that trading band a bit in the interim.

And expect the battleground for Saudi Arabian, Iranian, and Russian production to now shift to Asia, and in particular to the Chinese and Indian markets.

We may well be seeing some new geopolitical fireworks from there.

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  1. April 20th, 2016 at 07:51 | #1

    The attitude to trading in the markets is no different than the attitude required for surfing. By blending good analysis with effective implementation, your success rate will improve dramatically and, like many skill sets, good trading comes from a combination of talent and hard work. Here are the four legs of the stool that you can build into a strategy to serve you well in all markets. I will also love to invest wisely..

  2. Patrick Huff
    April 20th, 2016 at 11:51 | #2

    Our research into the global social-political-economic environments infers oil “prices that are being used as a weapon” will continue to fall and remain low in order to achieve the needs and desires of opposing sovereign interests. Among the series of strategic goals, this will soon impose an effect on the current global monetary system.

    Patrick D. Huff

  3. Stephen Goodall
    April 21st, 2016 at 19:19 | #3

    U S production fell by 900.000 barrels and the market reacted to it instead of the Saudi grandstanding. This shows the center of oil power shifting and it shocked opec. The Saudis tried to get back in front of the movement by quickly stating a new cap meeting was in the works. Since they have maxed out their production their only power move can be a reduction. If the democrats don’t outlaw fracking, we’re witnessing the beginning of the new world state of energy.

  4. Mike Huntzberry
    April 24th, 2016 at 16:33 | #4

    How ’bout Solar.

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