Fooled by the "Freeze" | Russell T. Rudy Energy LLC
“World Oil” reports that Ole Hansen, the head of commodity trading at Saxo Bank A/S, sees the current oil market as being distracted by the sideshow that is a possible crude production “freeze”, and missing the main attraction which is U. S. drilling and production.
Oil traders seem to be bidding up the price of crude based on the possibility of an illusory agreement among OPEC producers and Russia to freeze production levels until global inventories diminish. However, reaching agreements within OPEC, much less a broader accord, might be nearly impossible. Saudi Arabia has said that it will not agree to freeze production unless Iran goes along. Iran in turn refuses to halt production increases until its output gets back to 4 MMbopd (million barrels per day). Iraq, with the potential to significantly increase production, appears non-committal. Kuwait does not think that Iran’s co-operation is essential to a broader agreement, and Russia seems to like the idea of a “freeze”. However, Russia’s production appears to be already peaking.
Hanson opines, “The market can be fooled and we have been fooled. We have seen an almost 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.”
He goes on to say that U. S. producers will clearly be the drivers of any potential rebalancing of global markets. “No doubt they have the ability to react much quicker to price changes.” He, along with Goldman Sachs, UBS, and IHS Energy all agree that any meaningful price recovery could sputter as U. S. operators react to short term price improvements with increased production, thereby driving prices back down.
Reacting to high prices, U. S. production surged to 9.6 MMbopd last year, the highest level in three decades. However, when prices collapsed the domestic oil rig count dropped to the lowest level since 2009. With the fall off in drilling activity, production dropped to 9 MMbopd.
In spite of all the ups and downs and cross currents, Hansen agrees the International Energy Agency’s prediction that we could be facing oil supply disruptions due to the drastic cutbacks in energy investments worldwide. Both the agency and Hansen see market equilibrium in 2017 as a possibility.
Hansen concludes, “For every month they (Russia and OPEC) 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.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/4/8/oil-market-fooled-by-freeze-talks-seen-better-off-gauging-us .
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