Oil price movements in September will largely be at the mercy of central banks and OPEC, with supply and demand figures not offering conclusive evidence on the trajectory for oil prices.
Several bits of economic news from the U.S. probably scared off the Federal Reserve from taking any immediate action on interest rates. The markets had been watching to see if Janet Yellen would hike interest rates as soon as this month, but relatively unimpressive jobs numbers and low inflation are likely enough to stave off an increase for a few months.
According to Bloomberg, the futures market estimates that the probability of a September interest rate increase is just 24 percent, a decline of 8 percentage points after a Tuesday data release showing weak economic activity. The Institute for Supply Management said this week that the U.S. services sector saw activity plunge to a six-year low, a worrying sign for the economy. A separate manufacturing survey also disappointed.
“There is a lot of liquidity being created that has to find a home,” Tony Hann of Blackfriars Asset Management, told Bloomberg. “Bonds don’t look good value with record low or even negative yields. EM, especially Asia, looks good now that fears that China is going into melt down seem to have receded.”’
Delayed action from the Fed will lead to a weaker dollar. The Wall Street Journal Dollar Index, which measures the greenback against a basket of 16 currencies, fell by 1.1 percent on Tuesday. The weaker dollar provided a bit of a lift to crude oil – since oil is priced in dollars, a falling dollar stokes demand by making crude cheaper. Related: Saudis To Slash $20B In Projects To Close Budget Gap
However, it is impossible to parse out the dollar effect on crude oil from a variety of other key market trends, not the least of which is the ongoing rumors about an OPEC-Russia production freeze deal in Algeria later this month.
Expectations for an agreement in Algiers continues to rise. On Monday, Russia and Saudi Arabia announced a decision to cooperate on oil market stability. The agreement was vague but suggests that both sides are keen on a freeze deal. On Tuesday, Iran also lent its tentative support for a deal, which could turn out to be an even more important development. Iranian oil minister Bijan Zanganeh told OPEC’s Secretary-General that Iran would support measures to boost oil prices to the $50 to $60 per barrel range. "Iran wants a stable market and therefore any measure that helps the stabilization of the oil market is supported by Iran," Zanganeh said, according to Reuters.
What makes Iranian negotiators much more agreeable than they have been in the past is their success in ramping up oil production. The National Iranian Oil Company said on Wednesday that production has topped 3.8 million barrels per day, closing in on its pre-sanctions objective of 4 million barrels per day. “Iran is close to the 4 million target, but the freeze is a political decision,” said Mohsen Ghamsari, director for international affairs at the NIOC, referring to Iran’s oil minister. “We are now close to previous production levels, so now it depends on the minister’s decision.” Related: Is The Saudi-Russia Deal For Real?
All the key players seem to be coalescing around a freeze deal two weeks ahead of the meeting. But that does not mean they want to see oil prices rising too high too quickly. In fact, most OPEC members seem to be coming around to the idea that while they want oil prices to increase, they want to work to prevent them from heading north of $60 per barrel, reports The Wall Street Journal. Any higher, OPEC fears, and U.S. shale could bring a lot of production back. That makes the $50 to $60 range a sweet spot for OPEC – high enough to increase revenues but low enough to prevent “rivals from raising their output,” the Iranian oil ministry reportedly said.
How OPEC figures all of this out, at this point, is hard to predict. Many analysts still see an agreement in Algeria as a long shot, and in any event, irrelevant to supply and demand. But because oil prices are looking for some sort of direction, rumors from powerful entities such as central banks and OPEC tend to move the market.
“Look, we are in a bit of no man’s land right now here for oil; it’s not very bullish but it’s not too bearish…as such the market is gonna get whipped around by, whether it’s a big move in the dollar or a headline about a not-particularly-significant agreement totally devoid of all details,” said Seth Kleinman, global head of energy strategy at Citi, in a CNBC interview this week, referring to potential OPEC-Russia production freeze.
By Nick Cunningham of Oilprice.com
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