The machinations with oil continue as WTI crude caps a near 70% rise from its bottom in early February at $26USD per barrel to be at just below $44 today. This is after collapsing in October 2014 from circa $90USD per barrel – volatility is oils middle name!
What has driven this rise has been well covered, but what is going to happen thereafter is not as clear. As I’ve mentioned before, 50% rallies in oil are not unusual, neither are corrections of the same magnitude, but the longer term trend is harder to discern.
Over the weekend, a big meeting of major petroleum producers – sans the biggest (US of A) – in Doha, Qatar failed to reach any sort of agreement on further production cuts or freezes, as the surge in supply caused the collapse in prices throughout 2015.
The recalcitrant Saudis would not go ahead with any plan, mainly because their own domestic budget is in crisis as their concentrated welfare based economy is dependent on the liquid gold, but mainly because they did not want to agree with Iran, who was not present at the meeting. Iran recently announced it intends to ramp up production to 4 million barrels a day, its pre-sanctions level, which will obviously impact the Saudi supply glut.
There are signs that this “bad” news is good news for higher oil prices. Which is bad news for US consumers and the global economy. Follow?
From Bloomberg:
Pierre Andurand, the money manager who made 38 percent betting against oil in 2014, warned that signs of tension at a meeting of the world’s biggest producers this month in Doha point to increasing Middle East unrest that could eventually lead to supply disruptions.
The failure of oil ministers to reach an agreement at meetings in the Qatari capital “clearly revealed deep disagreement within the Kingdom and rising tensions between Saudi Arabia and Iran,” the manager wrote in a monthly letter to clients of his hedge fund, Andurand Capital Management. “As a result, we believe that the current escalation in Middle Eastern sectarian conflicts will likely result in more proxy wars that will eventually create more supply disruptions.”
Supply disruptions in the Middle East “would come at a time when the market is already rebalancing quickly which would add a large upside potential to our current crude oil price forecast,” Andurand wrote, adding that lower prices may have taken a long-lasting toll on production infrastructure.
Adding to the possible violent disruptions are actual outages – as high as 3 million barrels per day – as strikes in Kuwait have halved their output, pipeline leaks in Nigeria, lost supply in Iraq and Libya and finally Venezulean working capital crises all add up to a short term supply risk.
From FT:
“The market is increasingly pricing supply risk as spare capacity has disappeared,” said Olivier Jakob of Petromatrix, a Switzerland-based consultancy.
“We are back in an environment where the only spare capacity left is in storage tanks, and if those barrels start to be used then the crude oil structure tightens,” said Mr Jakob.
As I’ve said before, expect volatility as normality with oil as this supply disruption and the putting off by OPEC members of discussing planned cuts or freezes is pushed back further and further. The latest news is no meeting again until late May and that’s whats buoying markets right now.
In the longer term however, oil has a big target painted on it. The IEA reckons the demand/supply equation will rebalance later this year as demand growth keeps falling in developed economies. All the while developing markets – lead by India – continue to seek out more economical and environmentally safer alternatives.