US doesn’t believe in new oil cartel, and here is why

US doesn’t believe in new oil cartel, and here is why

Baku, Azerbaijan, March 9

By Vagif Sharifov - Trend:

The US Department of Energy has made the most pessimistic world oil price forecasts for the next two years this week, although I would call them pragmatic.

While the leading world oil producers are trying to agree on freezing of production to stabilize oil prices, and taking into account oil has recently reached almost $40 per barrel, the US Department of Energy's Energy Information Administration (EIA) has published a report forecasting the Brent oil average price will hit $34 per barrel in 2016 and $40 only in 2017.

Moreover, these estimates are even lower than EIA's previous forecasts by $3 and $10 per barrel, respectively.

The US pragmatism seems to be based on disbelief in the gentlemen's agreement to freeze oil production.

The US which is not involved in this project, connects the decline of its oil price forecast with the current sustainable level of the global oil production and expectations for the low demand on oil.

In other words, the market is so glutted with oil that the US is waiting for low prices in 2016 even given that the US itself will reduce production by 700,000 barrels to 8.7 mbd in 2016. In 2017 the US additionally will reduce shale oil production by 500,000 barrels up to 8.2 million mpd. Nevertheless the WTI oil price will increase by only $6 up to $40 per barrel in 2017.

Since the idea of freezing oil output was announced for the first time in mid-February, none of the market participants whom I spoke to believe in this "economic" project. OPEC's oil operations show that the cartel's determined oil quota is always broken by itself. As for example: OPEC's current quota, which was determined by the cartel itself, is 30 mbd.

The actual oil output by OPEC countries exceeded the quota by 2.3 million barrels of oil per day in January. Such volume of oil is daily consumed the entire Canada, for comparison.

Systematically glutting the oil market OPEC has become a hostage by its own policies - the situation from which now it is not able to get out alone. Market makers, economic experts, and, apparently, the EIA experts expect the similar break of quotas of the possible gentleman's agreement of oil freezing at least because it is very difficult to keep an eye on the proper level of oil output. Russia, Saudi Arabia, Venezuela and Qatar already agreed to freeze oil output at the level of January. Over 15 countries joined the project, according to the Russian Energy Minister Alexander Novak. The meeting, at which the possible freezing of oil output will be discussed, may be held by April 1 in Russia.

Technical surge

It is very probable that the countries, which developed the idea to freeze oil production, in fact, had no plans to implement this project, but hoped to make the prices rise - exert a strong psychological effect on traders. Indeed, on February 19, when the decision about the possible freeze was announced, the price for Brent spot stood at $31.66 per barrel.

On February 22, the oil price rose to $33.59 and remained in average at the same level until late February. In March, the average price for Brent spot has already exceeded $37 per barrel, and as of March 8 it amounted to $39.12 per barrel. In other words only announcement of the project to freeze the production already increased the spot price by 12 percent, while May futures for Brent today, on March 9, exceeded $40 per barrel.

However, no matter how strong the stress among traders is, the price, as is known, isn't defined only by supply, but also demand. If at various times until autumn of 2014, when the prices began to fall, the demand exceeded the supply for 2-4 million barrels of oil per day, in 2015, for example, these numbers were nearly equal - the demand was 93.77 million barrels per day and the supply - 95.71 million barrels per day.

The Energy Information Administration believes that the global demand for oil in 2016 will amount to 95.19 million barrels per day, and the supply - 95.93 million barrels per day.

The demand has really grown over the last 10 years by 10 million barrels of oil per day, but it was exceeded by supply, and this led to a fall of the oil market. For obvious reasons, none of the oil-producing countries waits that the other will reduce the production first, everyone wants to see only a rising demand for oil at the current production.

This demand can be created for example, with new capital investments.

However, loan markets are currently experiencing certain difficulties and state budgets of many countries are facing a deficit and are not ready to spend money. Moreover, economically successful countries in the Middle East began to save money, thereby reducing the consumption of goods and many states are reforming their monetary policy.

Despite the weak growth of demand, OPEC countries will likely continue to increase the oil production to uphold the market and compensate the budget deficit. Americans expect that the cartel will increase the oil output by 750,000 barrels per day in 2016 and bring it to 32.35 million barrels.

Iran is among the countries which don't pledge to freeze the oil output.

Although Tehran expressed full support to the idea of upholding the prices, it didn't join this initiative.

Oil export to the world market became a kind of compensation for Tehran in exchange for abandoning the development of its nuclear program.

It is obvious that Iran won't join such initiatives against the background of the fact that the country has been under sanctions for many years and experienced currency shortage.

Iran plans to increase the export production to two million barrels of oil per day in 2016.

What deteriorates the situation is that initially, Iran can significantly dump the oil market in order to get foreign exchange revenues.


Vagif Sharifov is an analyst and expert in oil and energy markets. Follow him on Twitter: @VagifSharifov

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