Oil investors looking for signs of a sustained price recovery would do well to assess US supplies rather than the banter between major producers on freezing output, according to Saxo Bank.
While Opec members and producers outside the group are set to meet in Qatar this month to discuss a deal, just a cap on output would have limited impact on prices because several participants are already pumping near record amounts of crude, Ole Hansen, the bank’s head of commodity strategy, said in an interview last Thursday. The rebalancing of the oil market amid a glut triggered by the US shale boom hinges more on American drilling activity, he said.
Oil has rallied since mid-February amid speculation that nations including Saudi Arabia, the biggest member of the Organization of Petroleum Exporting Countries, and Russia will agree to freeze output and shrink the glut that sent Brent crude to a 12-year low in January. For all the comments from various producers during “a cat and mouse game” in the lead up to the gathering in Doha on April 17, there’s been no definitive action on curbing supplies, according to Saxo.
“The market can be fooled, and we have been fooled,” Hansen said. “We have seen almost a 50% recovery in oil prices since the first signs of verbal intervention emerged back in January. So a lot has been achieved already without doing anything, so I think at this stage they will be very happy if they can just keep the market in the belief that action can be taken if necessary.”
While global producers are “buying time” and waiting for the focus to shift from the oversupply to rising demand, US producers will “absolutely” be the ones driving the potential rebalancing of the oil market, according to Hansen.
“No doubt, because they have the ability to react much quicker to price changes,” he said, referring to US producers. He warned that a price surge to $55 to $60 a barrel may prompt drillers to pump more. Others including Goldman Sachs Group Inc, UBS Group AG and IHS Energy have also said a recovery in crude may sputter once prices go high enough to keep US oil flowing.
After surging to 9.6mn bpd last year, the highest level in more than three decades, daily US production has dropped to about 9mn as of early April. Meanwhile, the number of rigs drilling for oil in the US has dropped to the lowest level since 2009.
Still, the market may reach equilibrium in 2017, according to Hansen. The International Energy Agency has warned that investment cuts taking place now because of the energy downturn increase the possibility of oil-security surprises in the “not-too-distant” future.
Oil prices had slid to $27.10 on January 20, the lowest level since November 2003.
With major producers already producing near record volumes, the impact of an agreement to keep output at January levels will be limited, said Hansen. Iraq has the potential to continue to increase supplies, even though the country still needs investments to boost output, while Russia is seen nearing peak production, he said.
Iran plans to boost crude output to 4mn bpd, the highest level since 2008, before it will consider joining other suppliers in seeking ways to rebalance the global oil market, Oil Minister Bijan Namdar Zanganeh said, according to a report from the Iranian Students News Agency on March 14. Saudi Arabia has said it will only freeze output if it’s joined by other suppliers including Iran, while Kuwait has signalled a deal doesn’t hinge on the Gulf state.
“For every month they manage to keep us satisfied, that something will happen, then we move closer to the time where the market will take over and start to look at the potential risk of where supplies are going to come from,” Hansen said.