• Global Crude Oil Prices And A Delicate Re-balancing Act

    Global crude oil prices have risen by more than 75% from near twelve-year lows reached in January. The recent spike was driven largely by unscheduled supply outages in major oil-producing centers including Canada, Ghana and Nigeria. Given the sustained, significant oil imbalance (the excess of supply over demand), the outages were seen by not a few traders as a major step towards a long-awaited, supply re-balancing.

    Estimates of the total oil supply reduction due to the outages including other withdrawals year-to-date, stood at about 2.5 million barrels per day, bpd, just a few days ago. Not discounting the recent price spike, such rapid supply withdrawal ordinarily would have generated a global price shock. The rather tepid market response was perhaps informative.


    Quite a few analysts believe an oil supply re-balancing is imminent, if not in progress already. Such sentiment however is not altogether consistent with extant market fundamentals.

    While the global oil imbalance has declined somewhat ― having fallen to 1.34 MMbpd in 1Q 2016 from 1.75 MMbpd in 4Q 2015 ― that decline was not driven by a growth in demand. According to recent data from International Energy Agency, IEA, global oil demand fell consecutively from 3Q 2015 through 1Q 2016, for a total decline of 660,000 bpd.

    Global Crude Oil Imbalance Continue reading  Post ID 483

  • A Brief On The Recent Oil Price Spike

    A projection by some energy analysts, of a re-balancing in global oil supply by 2H 2016 ― with oil prices in the US$45 to US$55 per barrel range ― left investors searching for that price “trigger”. The recent oil spike from the multi-year lows reached early this year to just under US$50 per barrel, only added fillip to investment sentiments. However, those prices have since fallen back somewhat and average first quarter prices remain well below those for the two previous corresponding quarters.

    Average Spot Crude Oil Prices


    Current market fundamentals do not support any sustained oil price spike. The excess of global oil supply over demand has been on an upward trend since 1Q 2014; and that imbalance increased by 500,000 barrels per day between 4Q 2015 and 1Q 2016. April crude oil production by Organization of the Petroleum Exporting Countries, OPEC, was 32.64 million barrels per day, the highest in recent years, Reuters reports. Iran, fresh from a restrictive sanctions regime is expected to add about 500,000 barrels per day to the global pot before the end of the year; and Russia, the highest volume producer outside of OPEC upped her seaborne exports for April. Most of the Middle East producers ― and they boast the world’s lowest production costs ― are producing at near-peak capacities while actively expanding capacities. Continue reading  Post ID 476

  • The Doha Oil Conference: A Bridge Too Far

    The recent conference in Doha, the Qatari capital, convened by some eighteen major crude oil producers ostensibly to re-balance global supply ended without a consensus and was adjourned sine die. Conferees included both members and non-members of the Organization of the Petroleum Exporting Countries, OPEC, including Russia. Crude oil prices fell significantly in the immediate aftermath ― U.S. futures falling as much as 6.8% in Asian trading ― but recovered somewhat, on news that a sector strike in Kuwait substantially curtailed the country’s oil production. Fund managers that bet on a supply freeze may see their portfolios severely affected and may be poised for a selloff. According to Commodity Futures Trading Commission, net-long positions on both West Texas Intermediate and Brent crude oil grades increased significantly in the lead up to the Doha conference.

    An earlier accord saw Saudi Arabia and Russia, two of the world’s highest-volume producers, as well as Qatar and Venezuela freeze output at January’s near-record levels. The deal, which left some investors sanguine about a consensus in the lead up to Doha, helped lift oil prices from about US$26 per barrel ― near twelve-year lows ― to just over US$40 per barrel. But the outcome of that conference was presaged. Any idea that the conference would be fruitful was always fatuous. Long-standing religious, ideological and geopolitical differences between two of OPEC’s highest volume producers, Saudi Arabia and Iran, scuppered the deal.

    Three critical points are informative:

    Questionable Exercise

    There was an inherent futility in that Doha conference. The major oil producers were already producing at near-peak capacities, so freezing output at such levels would have done little to curb the massive supply overhang. Oil Production - Russia, Saudi ArabiaEven if a supply freeze accord were reached, no protocol was envisioned ― neither is any in existence ― for monitoring producers’ compliance. Moreover, if breaches were determined, one wonders what sanctions would be prescribed and what capability there would be to enforce such. OPEC members routinely exceeded their production quotas when they were apportioned, and largely to no effective penalty.

    Previous production accords in 2001 and 2008 were quick to fizzle out. In 2001 for example, Russia was widely blamed for breaching the accord brokered by Saudi Arabia, between OPEC and the non-OPEC producers Mexico, Norway and Russia. Given the exigencies of the day, it is doubtful if any output freeze accord in Doha would have been maintained. Continue reading  Post ID 470