Rumours of possible Russian-OPEC cooperation push up oil price

Statements from Russia hinting at cooperation with OPEC have lifted the price of crude more than 20% above recent lows, which had pushed past 12-year lows amid concerns regarding imminent new supply from Iran and a slowing Chinese economy. However, any upswing in a volatile market grappling with uncertainties risks being wiped out the next moment. That would be especially true in view of the complexities in an OPEC/non-OPEC plan to cooperate on an output cut, writes Vandana Hari, Asia Editorial Director Platts and Research Scholar, McGraw-Hill Financial Global Institute, for Petroleum Review.

Agreement within OPEC to rein in output seems extremely remote given the tensions between Saudi Arabia and a sanctions-free Iran. Moreover, OPEC’s second largest producer, Iraq – which hit record high production in 2015 – hopes to boost output and reach 4mn b/d this year. Iran activated its planned 500,000 b/d oil output increase on 17 January. This volume would take Iranian output to around 3.39mn b/d and exports to 1.5mn b/d. The immediate impact on exports is expected to come from Iran’s considerable floating storage, which holds 47–49mn barrels of crude and condensate, according to Platts cFlow data.

The International Energy Agency (IEA) warned in its January report, of an oversupply of 1.5mn b/d in 1H2016. OPEC struck a more optimistic note in its monthly report, saying 2016 would see the start of the rebalancing process as deep capex cuts start to feed through to non-OPEC supply. Output in Canada – where all projects are now below cash cost – the North Sea, Latin America and some parts of Asia is particularly vulnerable, it said.

While the Chairman of state-owned oil giant Saudi Aramco said the collapse in oil prices to below $30 was ‘irrational’, the country had mentioned it was considering the potential sale of parts of Aramco, something many regard as unthinkable.*

On the demand side, the average of latest forecasts by the IEA, OPEC and the US Energy Information Administration (EIA) point to expectations of consumption growing by about 1.3mn b/d in 2016 versus last year, compared with an estimated 1.52mn b/d rise in 2015.

However, the oil market may not be buying the growth story as Beijing reported the slowest real GDP growth in 25 years in 2015 at 6.9%. More worryingly for the producers of raw materials, China’s energy intensity seems to be declining even more rapidly.

Oil demand in the world’s second largest economy and also the second largest consumer is expected to rise by just about 2.5% from a year ago in 2016, according to Platts China Oil Analytics, compared with 5.8% growth in 2015.

In the US, the world’s largest oil consumer, a relentless rise in oil stockpiles and contracting demand further fuelled the market’s negative sentiment. Commercial crude stocks in the US at 494.92 barrels in the week ending 22 January were the highest on record and nearly 30% above a year ago. Average four-week product demand, meanwhile, was down 1.7% on year.

With the oil price bottom still nowhere in sight, producers around the globe are hunkering down for prolonged pain. Oil-rich governments across the Middle East are slashing public spending, borrowing money, raising taxes and removing subsidies. The Russian ruble hit historic lows against the US dollar in January, while Venezuela is predicted to suffer the worst recession on the globe in 2016. Continued blood-letting in the corporate world will see further job and upstream capex cuts at oil and gas producers and service providers.

So, what gives? The world now waits for US production to cave in. The US EIA expects domestic output to decline by about 700,000 b/d this year to an average 8.7mn b/d, as current prices drive more shale producers out of business and bank loans start drying up. If true, 2016 will reverse the US’ relentless production growth trend of the past eight years. However, that may not suffice; the market can be expected to exact a much bigger price to rebalance.

*For more on developments in Saudi Arabia, see the March issue of Petroleum Review.