Saudi Arabia’s and Russia’s oil ministers tried to put a net under tumbling oil prices on Monday, with both officials saying they are open to the possibility of extending their oil output deal into next year if necessary.
Oil prices recovered on Monday, with world benchmark North Sea Brent crude futures having fallen as low as US$48.65 a barrel, trading back up at $49.42 in late afternoon UAE time, up by 32 cents on the day.
But oil prices have weakened over the past month on a number of bearish indicators, including signs of a softening of China’s economy, as well as resurgent US oil production.
As the oil price slide has gained momentum it has triggered speculators to sell even further, so that Brent futures have lost nearly 13 per cent since mid-April and are nearly back where they were in November before Opec and 11 non-member countries, led by Russia, agreed to cut a total of 1.8 million barrels per day (bpd) from their production to speed a rebalancing of a flooded world market.
Saudi Arabia’s energy minister, Khalid Al Falih, said at a conference in Kuala Lumpur on Monday: “I am rather confident the agreement will be extended into the second half of the year and possibly beyond.”
The minister had been keeping his options open as to whether the deal would be extended for three or six months after the initial six-month term runs out at the end of June. The comments, though non-committal, are being taken as a statement about the Saudis’ determination to stick with the deal until it achieves their aim of bringing world oil inventories back to their five-year average levels.
Meanwhile, in Moscow, the Russian energy minister, Alexander Novak, said: “We are discussing a number of scenarios and believe extension for a longer period will help speed up market rebalancing.”
There has been rising speculation about the producers’ commitment to the deal, since the surging US production this year has meant that their sacrifices have resulted only in ceded market share.
The producers have been frustrated by the fact the process is slow and complicated and does not show up right away in the most visible data, such as US inventory.
“The [oil inventory] draws haven’t been in visible stocks but that’s where it’s fallen short of expectations,” said Amrita Sen, the senior oil market analyst at Energy Aspects consultants.
“We have unloaded 55 million barrels of oil in floating storage in the Caribbean and elsewhere, we drew crude [oil stocks in the US] in April counter-seasonally for the first time in 10 years,” but it hasn’t been moving quickly enough for oil traders.
Influential analysts, such as Jeff Currie, the head of commodities at Goldman Sachs, have been bullish on oil in recent months, although he has pointed out that the view is not based on the output deal but on an upturn in the business cycle, which will rebalance commodities markets in the “medium-to-longer term”.
Also, Mr Currie has explained that in Goldman Sachs’ “new oil order” the US shale oil sector – with its remarkable flexibility – has become the main factor in establishing a base price for oil from which it will rise or fall. This year, he forecasts that oil prices will average $55 to $60 a barrel, which was the case in the first quarter but not so far in the second quarter.
The unwinding of the storage glut itself has caused short-term pressures, Ms Sen said.
The oil is coming out of storage not only from places like the Caribbean, but also from Opec, including Saudi Arabia.
“Opec members have destocked so that their exports have reduced by a lot less than their production,” she said. That means that their commitment to bringing down the glut so far “has been half-hearted; they need to cut exports, that’s the key”.
amcauley@thenational.ae
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