Volatility Likely to Prevail for Some Time to Come

WHILE some clamoring to cut output, and others speculating that the ministers could even opt for raising the production bar, the Opec ministers’ last Friday decided to adopt – rather consensually – a ‘wait and see’ strategy by rolling over its current target of 30 million barrels per day (bpd) – for at least until December.

And despite conflicting interests, interestingly enough, the ministerial was short and pleasing. ‘You would be surprised to see how pleasing this meeting was,’ a visibly relieved Saudi Oil Minister Ali Al-Naimi asserted in the end while announcing the outcome of the much-awaited, and indeed followed, Opec moot.

Ahead of the meeting, some, including Morgan Stanley and Barclays Plc analysts, have been speculating that the ministers might resort to even increase the output target, so as to accommodate incremental production from Iraq, Libya and post-sanction Iran.

Opec however opted not to go this way and spring surprises – at this stage. Crude producers are confronted with a number of issues.

With weakening oil markets, the pain within the producers’ group is more than visible. Despite the call on oil revenues growing in most member states, Opec crude revenues are set to fall by 46% this year – to around $446 billion, the Energy Information Administration is estimating.

And then there is a growing speculation that the output of some key Opec members is also set to go up – sooner rather than later.

Iranian Oil Minister Bijan Zanganeh appeared confident in Vienna that his country will pump an additional 1 million barrels per day (bpd) of crude within months of nuclear sanctions being lifted by the West.

Zanganeh insisted in Vienna that Iran could bring around half a million barrels of oil per day to the market within the next one or two months, upping that to around 1 million per day for exports over the next 6 months (of the lifting of the sanctions).

A flood of Iranian crude into an already oversupplied market would certainly exert overwhelming downward pressure on oil prices, most agree. Zanghaneh however, differed.

“I don’t believe we will witness a new fall in the oil price in the market (when additional Iranian crude enters the market), but the main issue for us, I should emphasize, is to achieve the traditional market share of Iran in the oil market,” he told CNBC in Vienna.

Not everyone is however is optimistic on that count. Bill Farren-Price of Petroleum Policy Intelligence is of the view that the influx of Iranian oil could have a rather big impact on prices.

“I think that is going to be the big question whether Iran can actually deliver these barrels, whether the deal is done by the end of June, but I do expect Iran will come back – it’s got a lot of oil in storage that will be released, they may make a bit of a splash when they start up again and that could have a big impact on the market certainly,” Farren-Price told CNBC.

Libya too hopes to double production to some 1 million bpd by September if key ports resume working. However, many are still skeptic about its full return to normalcy as all past efforts have failed to deliver a sustained recovery in shipments.

And Baghdad is not far behind either. Iraq is also endeavoring to increase its crude output. Speaking about Iraq’s oil output, Iraqi Oil Minister Adel Abdel Mahdi said: “We are less than our normal production.

Last year exports should have been 3.4 million bpd, this year it should have been 3.3 million bpd, we are still below this.” And then he stressed: “I think we should be approaching 3.2 million bpd within 2-3 months,” adding Iraq was capable of producing at least 6 million barrels per day by 2020.

However, many within Opec are still of the view that the possibility of additional crude from within its ranks is still considerably away.

“When (the additional) production comes, this matter will settle itself,” one OPEC delegate told Reuters. That may not occur until 2016, according to analysts questioning how quickly Tehran will win relief from sanctions and be allowed to sell more crude.

And thus the market reaction to Opec move was bearish. Oil in New York headed for the first weekly decline as Opec moved to maintain its crude production target, leaving the market oversupplied.

West Texas Intermediate oil for July delivery dropped 99 cents, or 1.7 per cent, to $57.01 a barrel at 9:36 a.m. on the New York Mercantile Exchange.

It has decreased 5.5% this week, set to snap a record 11-week rally. It was trading above $60 earlier this week.

Brent for July settlement decreased 95 cents, or 1.5%, to $61.08 a barrel on the London-based ICE Futures Europe exchange.

The contract is down 6.9 per cent this week. The European benchmark crude traded at a $4.06 premium to WTI, down from $5.26 at the end of last week.

The growing market glut is also fueling spare capacity debate. Despite being a capital intensive industry, persistent market glut and the gloomy mid-term horizon, seems brewing reluctance in the industry to invest in the sector in a big way.

The scenario has slammed strong brakes on the much required global investment in the sector – sowing the seeds of another supply squeeze and market upheaval some time in near future.

When Oil Minister Naimi was asked about the possible Saudi investment in the sector to boost the kingdom’s capacity and hence the global spare cushion, he had a quick answer: ‘show me the return.’

And then he quipped: “Is there demand for Saudi crude? Can you guarantee it? If I go and put a dollar, will you guarantee that I would get 10 percent on that dollar?” He then added: “I don’t want 16 percent, just 10 – can you guarantee that?”

In the meantime, Abu Dhabi’s quest to take it capacity to a record 3.5 million bpd, has also been delayed by at least another year, Abu Dhabi National Oil Co (Adnoc) officials were quoted as saying.

With a current capacity of about 3 million bpd, the company was targeting an increase of 500,000 by the end of 2017. The company will now probably add the final 100,000 barrels of daily additional capacity in 2018, Qasem Al Kayoumi, the offshore exploration chief at Adnoc told a conference in Abu Dhabi recently.

This lowering spare cushion and the application of breaks on a number of capacity expansions projects do not bode well for the long-term stability of the markets, one could say with some sense of conviction. Volatility seems to be in the driving seat – for some time to come!

(Source: SaudiGazette.com.sa)

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