- Hopes that Saudi Arabia will broker production target
- Khalid al-Falih to seek Opec unity and accord
- Everybody in Opec 'happy with state of the market'
- At what point might high-cost producers return?
- Big difference between ADP inventory and forecast for the EIA
- Established range of $45–$50 is expected to hold
It's busy day for Opec in Vienna today. Photo: Opec
By Ole Hansen
Members of Opec have convened in Vienna for the oil cartel's 169th meeting. The event comes at a time where Opec's role in the global oil market is increasingly being questioned. As this is the first meeting attended by the new Saudi energy minister, Khalid al-Falih, hopes have been raised that an attempt to show unity will be made. This comes after the previous Opec meeting and the April Doha meeting both ended in failure, laying bare the disagreements, especially between Iran and Saudi Arabia.
Prior to the meeting there has been a feeling that this meeting was going to be irrelevant. No decisions were expected as no decisions were required. The market focus has shifted away from Opec towards declining production in the US while major but temporary supply disruptions in Canada, Nigeria and Venezuela helped balance the market during May.
These events helped drive the price higher to levels that were otherwise not warranted at this stage of the recovery. With the price of oil having returned to $50 there is a big question about how much further oil can rally from here without inviting high-cost producers back to the market.
With global inventories still very elevated a sooner than expected stabilisation of US production may be more than the market can cope with at this stage.
On that basis Opec will try to show unity but at the same time refraining from initiatives that would drive the market higher thereby risking ruining the gradual and longer term sustainable recovery. Several Opec sources have been indicating that Saudi Arabia and its Gulf allies would propose to set a new collective ceiling in an attempt show unity and repair Opec's reputation. The introduction of a production ceiling will not have a fundamental impact but could still be short term bullish considering the recent failures.
At 0800 GMT the open session began and during the first part of this session the press is allowed in which normally results in a major scramble to extract comments from the various delegates. Not least from Khalid al-Falih, the new Saudi energy minister who among other thing said that everyone within Opec with one voice is satisfied with the market as it is rebalancing and prices will respond accordingly.
He also said that "we will not shock the market" as we "want long-term stability" in order to encourage long-term investment. In terms of the price he said that no one can determine what the equilibrium price is but that he thinks it (the price) is on the way up. Opec's role is to leave the market to do what it has to do in order for it to balance in a gentle way.
Iran, which has a long-term target of producing 4.6 million barrels per day compared with 3.5 million bpd in April and just 2.8 million during the years of sanctions, also said that introducing a production ceiling without individual quotas did not make any sense.
In the short term we see both WTI and Brent crude maintain the established trading range between $45 and $50. Depending on what kind demand we will see across the Northern hemisphere and especially in the US this summer we should see oil continue its ascent as we approach year-end. This should leave both oils trading within a $50 to $55 range by year-end.
WTI crude oil is currently trading within a $48 to $50.9 range
In 2017 the price should continue its ascent, albeit at a slower pace than what we have seen this year. We currently expect Brent to trade no higher than $65 by the end of 2017.
Key drivers and risks ahead
Major supply disruptions, which according to Citi reached 4 million bpd, were the main driver behind oil's additional gains during May. Some of these will extend into June thereby providing support.
Against this the market will be watching closely developments in US production and inventory levels. The sharp rally in crude oil during the past three months may slow the production decline and if we see a reversal it may have a short term negative impact on prices. In the US the demand for gasoline and refinery margins into the summer driving season will be a key as well given its potential impact on oil demand and the ability to bring down inventories from an 80-year high.
Developments in US monetary policy over the coming months will also be watched. The US Federal Open Market Committee's decision on interest rates will play its part tin determining the direction of the dollar into the second half of 2016.
Following the press conference from Opec today at 1400 GMT we have the weekly inventory report from the EIA. Some confusion exists ahead of this report following the API last night which showed a surprise and counter-seasonal rise in weekly inventories by 2.4 million barrels.
Against this we have the EIA report today where surveys are pointing towards a 2.6 million decline. Apart from inventories other data such as production estimates as well as refinery demand and gasoline consumption will be watched closely.
Latest developments in US energy market
Source: Bloomberg, Saxo Bank
– Edited by Clare MacCarthy