The bears became bulls, or rather the shorts became longs as they covered their positions on the news. But after a bit more reading and thinking, prices retreated and finished trading lower from the close the day before because the agreement isn’t worth the paper it was printed on.
Yes there’s an agreement, but with some pretty important provisos. First up it is a freeze, not a production cut, and the freeze is applies to production levels as at January, 2016, when OPEC states were producing at near record levels. Then there’s the biggest point – the supposed agreement depends on other producers joining in, which is by no means guaranteed.
In reality that means Iraq and more importantly Iran, which is just starting to ramp up output after having the western sanctions lifted. Iraq produced at record levels in January of around 4.3 million barrels a day and seems determined not to cut output.
And, there is a important non-oil point to it – both Iran and Iraq are Shia Muslim countries, Saudi Arabia and its fellow gulf states are Sunni – the religious divide between the two streams of Islam extend far and wide and there are already reports that Iran seems this as a Saudi (Sunni) plot to damage Iran.
Iran’s exports halved between 2011 and 2015 from a pre-sanctions level near 2.6 million barrels a day (mbd). Iran wants to boost that by a million barrels or more a day, according to industry reports in the past month.
Over the weekend, Iranian officials said the country had increased exports by 400,000 barrels a day. That is not a positive signfor this agreement because the higher output has happened this month.
Saudi Arabia abandoned its three-decade policy of adjusting supply to support prices and has increased output above 10mbd as it looked to protect market share and suppress prices to try and damage the US shale oil sector which has become a major source of non-OPEC production and a price destabiliser.
And finally, the idea could be self-defeating if prices rise, relieving pressure on the US shale sector in particular, and then other non-OPEC producers who are being pressured by the 70% slide in prices since mid 2014. The US shale groups would be quick to boost production if there was a sustained rise in prices.
In New York, March West Texas Intermediate crude futures fell under $US29 a barrel, after trading as high as $US31.53 a barrel in early electronic trading. It ended at $US29.04 a barrel, down 1.2%. And in London, April Brent crude futures fell 1.5%, to $US32.93 a barrel, after hitting a high of $US35.55 a barrel earlier.
OPEC data shows, Russia’s 2015 oil production reached a record high of 10.8 million barrels a day. OPEC’s output also rose by 280,000 barrels a day to 32.63 million barrels a day, according to the International Energy Agency, which attributed the additional supplies to Iran, Saudi Arabia and Iraq.
And finally, with global oil markets oversupplied, demand is drying up. The International Energy Agency sees global oil demand growth slowing to an extra 1.2 million barrels a day compared with the 1.6 million barrels a day increase in 2015.
Finally, gold prices were hammered lower overnight, partly by the oil news, but also by better trading conditions on all markets. Comex gold prices were down $US34 an ounce at $US1,204 at 7am.
