Crude oil has charged higher in recent weeks on hope that supply may be curbed. An announcement from OPEC suggests they may begin to restrict supply to support a higher long term price. Is the oil landscape fundamentally changing? Or is there still too much supply in the pipeline?
Optimism has returned to the oil markets which have seen over $11 a barrel added to the price of WTI crude in 3 days. The rally at the end of last week was sparked by a large draw on oil reserves in the official Energy Information Agency (EIA) report. The oil inventories report showed 5.45m barrels less than the week before, the largest weekly draw since early June.
The rally continued early this week when the EIA also released its production figures and forecasts for the US industry. It showed that June’s monthly production has fallen from 9.4mbd to 9.3mbd which has given the oil bulls hope that the US industry is finally responding to the lower price, and some producers are being forced out. The EIA also said it was revising its method of estimating oil production which will lower the figures for the first five months of this year by between 40,000-130,000 barrels per day.
The biggest movement in oil prices came after an announcement from OPEC hit the wires. The oil producing cartel said that they were willing to hold talks with other oil producers to “achieve a fair price”. The market read into this, concluding the cartel was willing to curb production in an effort to prop up prices. "OPEC, as always, will continue to do all in its power to create the right enabling environment for the oil market to achieve equilibrium with fair and reasonable prices."It will be interesting to see exactly where this goes and who is involved, but it seems OPEC is giving up on its price war to force the US producers out of the market.
On a separate note, The Venezuelan President Nicolas Maduro will meet with Russian President Putin to discuss “possible mutual steps” to stabilise global oil prices this week. If Russia is willing to meet with Venezuela, then it is likely to meet with the whole of OPEC to try and find ways to prop up prices. What will be interesting is if the US is invited.
There was plenty to be bullish about in the oil markets over the last week, but will things really change? The rig count out of the US suggests otherwise, with it ticking higher for a sixth straight week to 675 rigs drilling for oil. This suggests that US production is unlikely to tail of in any meaningful way which would support prices.
Iran is still waiting for sanctions to be lifted, and investment in Iranian oil is being planned already. India’s Oil Corp. is said to be planning a petrochemical plant worth $3 billion. This will likely be the tip of the iceberg, if and when the sanctions are lifted. Iran’s infrastructure is ailing after decades of neglect, which makes it a perfect investment target for international oil companies. Iranian oil production is expected to double from 1.2mbd to 2.3mbp if sanctions are lifted, according to Iranian officials. Some estimates have this as high as 4mbp, which is Iran’s pre-sanction level of production.
All of the above is on the supply side, looking at the demand side and one factor stands out; China. The economic slowdown in China could have a dramatic impact on demand for oil. The recent fall in prices is largely thanks to the expectation that economic activity will fall in China. That is likely and we are already seeing the effects on other commodities, such as iron ore. The big unknown is how deep will it be?
So to conclude, has the fundamental landscape changed for oil? Not really. We may see US production tail off slightly but a lot will hinge on the outcome of the OPEC talks. There is plenty of supply in the pipeline (pun intended) from Iran which will likely keep the oversupply in place, especially with demand from China likely to soften considerably.