Just two months ago, fears of plunging Iranian supply had the oil market and analysts wondering how high prices could go and if we are about to see $100 oil again.
Just a few weeks later, no one's talking about $100 anymore, and oil analysts and traders are trying to guesstimate if oil prices will rebound from the current lows, after the sell-off in recent weeks wiped out this year's gains.
Many analysts see room for recovery, factoring in expectations that OPEC will announce a sizeable cut in early December to lift Brent Crude prices out of the low $60s into the $70s.
One of the analysts expecting an OPEC-assisted rebound in prices is legendary oil trader Andy Hall, who was nicknamed 'God' for profitably predicting oil prices.
"The balance of risk at this point favors some sort of recovery," Hall said in a recent interview with Bloomberg. "It's quite likely OPEC will come through with some sort of cut in the next month or two," said Hall.
Citing data from geospatial analytics company Orbital Insight, Hall told Bloomberg that over the past few months, oil inventories have jumped in OPEC countries, Europe, and North America.
On the demand side, stronger U.S. dollar against emerging-market currencies and concerns over the U.S.-China trade war have been weighing on demand, according to Hall.
Andy Hall, the legendary oil trader who had bet on higher oil prices for more than a decade, continued to hold his bullish view even after the 2014 oil price crash. But in the summer of 2017, he closed his main fund Astenbeck after the fund posted double-digit losses.
"In short, Opec, the market and oil bulls have run out of runway," Hall said in a letter to investors seen by the Financial Times in July 2017. Related: Trump's Impossible Decision Over Saudi Arabia
Hall now sees prices recovering and OPEC taking a decision at its December 6-7 meeting to cut oil production again to prevent another glut and lift the price of oil.
Both OPEC and the International Energy Agency (IEA) have recently said that oil inventories around the world have been rising lately. However, the two organizations have different views on what growing stockpiles mean. The IEA sees the inventory build "as a form of insurance, rather than a threat." OPEC, for its part, is already discussing cuts to prop up prices, after having boosted production to offset what it expected to be a significant Iranian supply plunge. The drop-off hasn't materialized yet-at least not as steep as feared-also thanks to U.S. waivers to eight key customers of Iran's oil.
Analysts have started to widely expect OPEC to announce a cut of at least 1 million bpd in December, and anything less could disappoint and sink oil prices further.
However, over the past week, analyst views have become more clouded due to the complicated U.S.-Saudi Arabia ties. Riyadh may be disappointed that it may have been 'duped' by the U.S. into pumping more to offset Iranian losses. But the U.S. Administration this week refused to blame the Saudis for the killing of Jamal Khashoggi, and President Trump thanked Saudi Arabia for the low oil prices and urged for even lower prices. Related: Trump Thanks Saudis For Lower Oil Prices, Wants Even Cheaper Crude
"It's impossible now to do fundamental analysis with any form of certainty because of what's going on with the U.S. Administration and their relationship with Saudi Arabia," Amrita Sen, chief oil analyst at Energy Aspects, told Bloomberg on Wednesday.
Based on fundamentals, OPEC is absolutely pushing for a big cut-they know what they need to take off to balance the market, and it's about 1.4 million bpd, said Sen. However, Energy Aspects' chief oil analyst noted that no one on earth can know whether Saudi Crown Prince Mohammed bin Salman won't just tell Energy Minister Khalid al-Falih, "No, you can't cut".
A 'no-cuts' OPEC meeting may fulfill President Trump's wish for further declines in oil prices, and by extension, lower gasoline prices, but WTI Crude in the low $50s or below is dangerously close to the breakevens in some U.S. shale plays that have been booming with the higher oil prices. Such is the Bakken in North Dakota, where oil production continues to hit new record highs this year, beating the previous record from late 2014.
"At current prices, Bakken producers in North Dakota are at real risk," Sen told Bloomberg, adding that even in areas of the Permian, production growth "will absolutely slow" if the current WTI prices persist.
Oil prices have room to rise if OPEC manages to bring a still hesitant Russia on board and announces a sizeable cut in two weeks. However, geopolitics could trump fundamentals again and depress prices further downward.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More
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Comments
The global oil market fundamentals are still as robust as in October when oil prices hit $87 a barrel. The market has had a small pocket of glut then which may have increased recently to a 700,000 barrels a day (b/d) by Libya lifting its oil production to 1.2 million barrels a day (mbd).
Still, the global oil market and OPEC need to hold their nerve. The global oil market need not get carried away with bearish sentiments and OPEC need not rush to cut production.
The slumping oil prices despite US sanctions on Iran proves abundantly clear that the sanctions have so far failed to cost Iranian oil exports a loss of even one barrel. That is despite the fact that the global oil market has been bombarded on daily basis for months prior to the sanctions by projections including IEA’s that the sanctions will cost Iran’s oil exports some 500,000 b/d to 1.5 mbd. Furthermore, the issuing of sanction waivers to eight countries is the clearest admission by the Trump administration that their zero exports option is out of reach and that sanctions are doomed to fail miserably.
OPEC doesn’t have to cut production in its meeting in December. A better idea is for Saudi Arabia and Russia to withdraw the 400,000 b/d and 250,000 b/d they respectively added to the market and return them to the previous 1.8 mbd cut under the OPEC/non-OPEC agreement. In so doing, the glut in the market will be reduced. Libya will also have to commit not to raise its oil production above 1.2 mbd if it is to continue to be exempted from the production cut agreement.
And contrary to common wisdom, the escalating trade war between China and the US hasn’t in any way dampened China’s thirst for oil. China’s imports have been increasing by bounds and leaps in recent times.
The news that oil companies have lost an estimated $1 trillion since the oil began its latest slide over a 40-day period since October demonstrate the importance of high oil prices to the global economy.
I have always argued that a fair price for oil ranges from $100-$130 a barrel. Such a price is good for the global economy since it invigorates the three biggest chunks of the global economy, namely, global investments, the economies of the oil-producing nations and the global oil industry.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
For the life of me, I don't see why OPEC+ doesn't set a price floor, say around $75, maybe in a basket of currencies including the EU and China. Shale and other producers could undercut the price, but in the end the world has to buy from OPEC and Russia. Regardless of the price, X number of barrels every day must be purchased. Would they lose some market share to shale? Sure, but that's happening anyway, so what do they have to lose?
Thought you might have cottoned on shale doesn't care about profits or the financials. They already are producing full tilt.
OPEC cannot set a floor price as that would be blatant price fixing and could lead to military action or sanctions against them !