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Article / 02 June 2016 at 10:24 GMT

Opec meeting and inventories – busy day in the oil market

Head of Commodity Strategy / Saxo Bank
  • 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
WTI crude oil, first month cont.
Source: SaxoTraderGO 

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
EIA inventories
 Source: Bloomberg, Saxo Bank

– Edited by Clare MacCarthy

Ole Hansen is head of commodity strategy at Saxo Bank. His Twitter account was cited by MarketWatch as one that investors should follow in 2016.

John Roberti John Roberti
Dear Ole,
I have a difficult time to understand the fixation of the market on US oil stock! It seems to me that oil stock is the result of domestic production plus imports minus exports and domestic consumption. Only two elements are significant for oil prices that is consumption and production. You indicated last week that consumption had slightly declined and domestic production decreased by 18 BPD which is not significant for the glut situation. The Journal of Montreal indicted this Tuesday that Soconor had called last week 3500 workers back to the plant and was intended to be back in full production this week end. Thus next week, the us imports from Canada should be back to their normal level unless you have other and better information regarding Canada. Also studies are more and more inclined to believe that world consumption will not increase as fast as previously thought.
John Roberti John Roberti
Then the last serious chance to assist the rebalancing could come from Venezuela! Saxo Paris indicated this morning that Venezuela should go broke latest at the end of the year unless political upheaval or revolution which could accelerate the movement! Thus I am a bit surprised when you say that if the US stock decrease by 5 or 4 million barrels then the prices should go up? Could you explain?
Ole Hansen Ole Hansen
Hi John. I see limited (positive) impact from US stock reductions over the coming months as it will be entirely in line with the seasonal behavior. Inventory rises on the other hand will not and could have a negative impact on prices. I maintain the view that the upside potential for oil above $50 remains limited at this stage. Involuntary supply disruptions will begin to fade, not least in Canada which should help reduce the 4M bpd disruption seen during May. The oil market is very much driven on sentiment and themes. The theme for several months now has been the ongoing reduction in US production. If that decline begins to fade the attention may instead turn to Opec where production has continued to rise. These observations are the reason why i see the most likely range for oil to be $45 to $50 during the coming months before rising towards year-end.
John Roberti John Roberti
Thanks I understand better now that the market is driven by themes and thus we have to wait another theme come into play to see which direction the oil will take! Quite frankly, I would be flabbergasted if Opec meeting was producing anything meaningful with Iran and Iraq determined to produce as much as they can and Saudi not really wiling to cut their own production seriously, not to mention Russia in serious financial troubles with the oil prices and the sanction and not interested to reduce production as well.
Ole Hansen Ole Hansen
Despite several Opec members saying that the meeting was "excellent" they nevertheless failed to reintroduce a production ceiling. The fact that the talk of a production freeze was only introduced yesterday when Saudi Arabia and its Gulf allies raised expectations has left this meeting more or less where we expected it to end. No agreement and no decisions because no decisions were necessary at this stage where the oil market is slowly moving towards balance.

However having raised expectations and then removed them again shows how Opec struggle to agree on much apart from status quo. As a result the short term focus for oil could once again turn towards the downside. With key technical levels currently being tested there is a raised risk of a deeper correction.

Next up however is the weekly US inventory report which often tend to move markets more than what we have seen in aftermath of the latest news from Vienna.

WTI last 48.1 -1.8% and Brent at 49 -1.4%
John Roberti John Roberti
thanks again and I agree with you that it will turn probably to the downside if Us production does not fall to much and if us consumption does not increase significantly
Ole Hansen Ole Hansen
EIA inventory report.
Ole Hansen Ole Hansen
A price friendly report with crude oil inventories lower, albeit not by as much as expected. Cushing inventories also fell while production continue its relentless decline and gasoline demand picked up again.
John Roberti John Roberti
dear Ole, the 32 BPD of production lost and the few thousands bp gasoline extra consumed should not have a major impact on oil price once the dust will settle thus I believe the oil price should continue to go down in view of the excess world production and the non event with Opec.


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