Upward swing gains support from fall in US inventories, but stocks are still high and the price very low
Having hit a low of $32 a barrel on Tuesday, the international benchmark Brent crude rose above $34 overnight and continued to move towards $35 this morning after Bijan Zanganeh, the Iranian oil minister, said the country "backs any measures which help stabilise the market", referring to the agreement to freeze output at January levels.
The comments came at the end of a meeting with ministers from fellow Opec members Iraq, Qatar and Venezuela, the latter two of which are trying to build support for the deal to halt a downward spiral in the oil price that is battering budgets. Both have also agreed to hold production at last month's total – but the accord only stands if other powers, and notably Iran, join.
Helping the upward swing was a shock drop in oil reserves in the US. The US Energy Information Administration reported stockpiles fell by 3.3 million barrels last week, notes Reuters, compared to a consensus estimate for another build of 3.9 million barrels.
But all is not plain sailing. It is worth noting that oil remains at a painful low, well below the level needed for producer companies in many areas to make a profit from extraction, and few analysts believe the current rally marks a bottom for the market. Indeed, most predict a period of intense volatility lies ahead.
Not only is output running at as much as two million barrels a day above demand – and onshore stockpiles in areas such as the US remain very near record levels – but there is also considerable doubt that Russian-Saudi deal will succeed. Critically, Iran is almost certain to insist on at least being able to return production to pre-international sanction levels.
"Such a freeze will have little impact on the oil market as proposed, while there remains high uncertainty that it even materialises, in our view," said Goldman Sachs analysts in a client note. "As a result, our oil supply and demand estimates remain unchanged and we reiterate our view that oil prices will remain volatile."
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Oil price: why traders turned sour on Saudi-Russia output deal
17 February
Oil made sizeable gains in the early part of Tuesday, after a landmark deal appeared to have been agreed to curb excessive global supply, but traders turned sharply negative later on.
Having gained more than six per cent at one point to above $35.50 a barrel, international benchmark Brent crude slipped back to a little above $32 by the end of its session in New York, representing a loss for the day of 1.2 per cent. This was despite Russia and Saudi Arabia, the largest producers in the world, agreeing to freeze output at January levels.
However, as the tentative deal remains contingent on other producers, most notably Iran, taking part, traders have effectively rejected it.
Iran has just emerged from international sanctions and last night, Mehdi Asali, its Opec envoy, told Reuters it would be "illogical" to expect it to, in effect, freeze production at pre-sanctions levels.
This might scuttle the chances of the deal being finalised – and some are unhappy with the extent of the action on supply in any case. Russia is pumping at a post-Soviet era high and Opec's production is similarly at its greatest for years, so current oversupply of one to two million barrels a day would simply be entrenched. Analysts had instead hoped for a significant cut.
"Any price spikes are going to be short-lived unless they take two to three million barrels off the market," Tariq Zahir, the managing member of Tyche Capital Advisors LLC, told the Wall Street Journal.
There is some hope the deal could be the start of something more substantial, however. Not only is it an important first step indicating that the largest producers are feeling the pain of low prices, but non-Iranian sources told Reuters the desire to get a deal could be so strong that concessions might be made to allow Iran to return to reasonable production levels.
More talks are taking place today with the oil ministers of Opec members Venezuela, Iran and Iraq – and the wrangling is likely to go on for some time yet. As such, the general view is that, until a clearer picture emerges or a more definitive production cut is agreed, the oil price will stay volatile and could even slump to a new low.
Goldman Sachs issued a note on Monday branding the market "directionless" and predicting price swings between $40 and $20, or even lower if momentum builds as a result of the big short position many investors have adopted.
Oil price: Saudi Arabia and Russia reach supply deal – but will it be enough?
16 February
The oil price pared gains made earlier in the week in a volatile start to Tuesday trading in Europe after a deal was finally struck to contain rampant supply.
International benchmark Brent crude had surged more than five per cent to above $35 a barrel on Monday, as news broke that a meeting between the oil ministers of several powers would take place in Qatar, which currently holds the rotating presidency of the Opec cartel.
Importantly, both Russia and Saudi Arabia, the de facto Opec leader, were to be represented.
However, when the outcome of the meeting emerged, prices slumped back below $34. Four producers – Russia, Saudi Arabia, Qatar and Venezuela – have agreed to stop increasing supply by holding output at January levels, CNBC reports.
In some respects, this is positive. Russia and Opec, driven by Saudi Arabia, have been ramping up supply in the past 18 months - and especially in the last two - as they fight to secure market share and force out rivals. A pledge to freeze production will help calm the waters and allow rising demand to begin to rebalance the market.
However, January saw Russia and Opec's exports hit multi-year highs so the freeze, even if successful, would keep supply at a very high level.
Added to that, the deal is conditional upon other producers agreeing - meaning in particular that the likes of Iran, which is gearing up its oil output again after emerging from international sanctions, and Iraq would have to be on board.
Venezuela's minister, Eulogio Del Pino, told the Financial Times he is to discuss the proposal with his Iranian and Iraqi counterparts on Wednesday. His Qatari counterpart, Ali al-Naimi, branded the initial meeting and deal as a "success" and said he hoped other producers would agree to the terms.
As time went on, prices started to rally and at 10am, were back above $34. This could suggest that while the supply freeze is not the sort of action some had hoped for, it is at least some movement on supply and could help establish a bottom for the market.
If other producers scupper the plans, of course, all bets would be off.
"It's really the first supply management decision taken since November 2014, so even though there will be some that will try to discount it and say it's not a cut, it's a change. It is a big change in policy," Petromatrix strategist Olivier Jakob told Reuters. "It's quite typical to have some volatility when (headlines) come out, but I think over the medium term, people will start to review their positions."
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