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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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What Happens To Oil If Doha Disappoints

The stage is set for Sunday in Doha, with the world keenly watching the outcome. The traders’ week will start a day in advance, staring at their TV sets and reading the latest updates on Oilprice.com. But will the oil traders sell the news, having bought the rumour, pushing oil prices up by 70 percent from their lows?

Unofficially, the freeze in the Doha meeting is already agreed upon, because the 11 OPEC nations attending the meeting are pumping 487,000 barrels per day (b/d) below the agreed January freeze limit of 29.1 b/d. In terms of agreeing to a production freeze, the Doha meeting is a success even before it starts. But it’s kind of a dull success at best.

In fact, the members can go ahead and surprise the world by agreeing to cut production by 400,000 b/d, without affecting the current production levels.

(Click to enlarge)

Though an agreement between OPEC and Russia on any kind of a cut or freeze is sentiment positive, it doesn’t change the demand-supply scenario significantly. Related: Have We Seen The Bottom In Oil Prices?

The drop in the non-OPEC supply led by the shale oil drillers in the U.S. is essentially impacting the supply-side balance. U.S. oil production fell to an 18-month low, below 9 million b/d last week, according to the IEA report.

The OPEC monthly report expects non-OPEC supply to drop to 730,000 b/d from an earlier forecast of 700,000 b/d.

Similarly, the International Energy Agency (IEA) expects non-OPEC production to drop the most since 1992 by 700,000 b/d. Due to a drop in production, the IEA expects the supply glut to ease in the second half of the year to 200,000 b/d from 1.5 million b/d expected in the first half.

(Click to enlarge) Related: OPEC Report Suggests Massive Oil Price Rebound

On the other hand, OPEC members pumped 32.47 million b/d in March, which is 1.2 million b/d above the required average in the first half of the year. However, OPEC supply is 90,000 b/d lower than the February production--even with Iran pumping 400,000 more than January levels.

The drop in OPEC production is due to disruptions in Iraq, owing to the closure of the northern export pipeline affecting 600,000 b/d, and Nigeria’s suspension of the Forcados grade leading to a drop of 250,000 b/d, reports Bloomberg.

On the demand side, the OPEC report expects demand to increase by 1.2 million b/d, whereas the IEA expects the demand to rise by 1.16 million b/d. With a slowdown in China, the IEA expects India to be “the main engine of global demand growth,” and its demand is expected to grow by 300,000 b/d.

Oil will form a short-term top after Doha

The OPEC nations and Russia depend on oil revenues for their fiscal budget and are struggling to cope with low prices. An example was Angola, which has sought IMF aid. Soon, other nations will follow. Hence, most nations cannot afford a production cut, and if prices rise, most will be tempted to raise their output to rake in as many dollars as possible. As such, higher prices due to either a cut or a freeze will not sustain. Related: Tesla And Other Tech Giants Scramble For Lithium As Prices Double

Iran, which is the joker in the pack, has played its cards smartly, increasing production gradually. However, if prices were to rise, they would ramp up production at a faster pace.

U.S. shale oil drillers will also return if crude prices rise. The demand and supply balance will again tilt to a supply glut by the end of the year if prices move north of $50/b.

So whatever the outcome, prices should touch $50/b and retreat, forming a trading range.

By Rakesh Upadhyay for Oilprice.com

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  • Natronic on April 16 2016 said:
    They won't agree because Iran won't stop pumping. I think I saw an article the other day where they are exporting the equivalent of 2Mbpd. Iran is using oil as a weapon against the Saudi's. This won't end well for the Saudi's.
  • John Scior on April 16 2016 said:
    I do not anticipate anything concrete coming out of the meeting in Doha in terms of agreements to reduce production. Iran wants to make up for lost revenue it suffered during the imposition of sanctions. The main plus that it signifies is that both OPEC and non-OPEC producers are finally getting together to discuss their mutual problem which is overproduction and the lower prices it has brought.
    Even if a production cut was achieved, there are still oil frackers that will once again ramp up production as prices make their production more viable. Not to mention, oil sands producers and alternatives such as Electric vehicles as well as biofuel substitutes waiting by the sidelines to step up to the plate if gasoline prices reach too high of a price.
    One factor that may support higher prices at present is the realization by bankers that they overlent to oil frackers during the boom in anticipation of continual increases in oil prices. I'd anticipate the larger banks stepping in to futures markets to artificially support higher prices until they can mitigate their loan loss exposure.
  • mithun on April 17 2016 said:
    I think this article has lot of errors. One of them is "The OPEC monthly report expects non-OPEC supply to drop to 730,000 b/d from an earlier forecast of 700,000 b/d."
    How can this theoretically happen. Russia and US Shale oil producers which are non -OPEC pump close to 20 million b/d. Please don't post this kind of articles which tests my fundamentals let alone oil market fundamentals.

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