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Oil Prices Nosedive On Bearish IEA Report

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Is OPEC Deal Compliance About To Crash?

OPEC’s victory lap to celebrate…

Did Saudi Arabia Just Flinch?

Did Saudi Arabia Just Flinch?

As has become the norm, oil markets reacted suddenly to comments by OPEC’s secretary general regarding the possibility of oil reaching $200 a barrel should investment die off due to the current price decline. However, any resurgence (crude futures erased their losses in New York for a time yesterday) was short-lived as news from elsewhere in the space regarding U.S. crude oil reserves and production numbers from around the world, returned market sentiment to normal. It appears little can wake slumbering bears in the oil markets.

At present, the oversupply in the market is estimated at approximately 1.5 million barrels per day. Figures released by the American Petroleum Institute on Jan. 23 showed U.S. inventories reaching their highest December levels since 1930 of 383.5 million barrels. In addition, U.S. production increased by 16 percent to 9.12 million barrels a day, the highest level in a single month since February 1986. A report by the EIA expected on Jan. 28 is expected to show a third consecutive week of growth in U.S. crude inventories.

Related: Oil Prices Changing The Face Of Global Geopolitics

Last year, oil prices dropped by 48 percent, to their lowest since 2008, and yet global production rose by 2.1 percent to 93.3 million barrels a day. The EIA is predicting consumption by the 34 members of the OECD to drop to 45.6 million barrels a day in 2015. Figures like these, in combination with comments from key oil ministers within OPEC, do little to restore confidence in the markets.

Short WTI positions increased by 6,262 contracts to 94,203, net-long positions fell by 3.3 percent to 216,704 with producers increasing their net-short positions by 7,623 to 132,143 contracts. Elsewhere in the markets, bullish bets on gasoline increased by 5.8 percent to 39,418 contracts with futures increasing by 3.5 percent to $1.3128 a gallon. In combination with the spate of recent cuts to capex and employment by many oil majors, with BP opting for a pay freeze in 2015, it is unsurprising that market sentiment is so weary.

However, to claim that oil could reach $200 due to a lack of investment is incredibly far-fetched as, even if shale operations continue to be pared back in the U.S., with Canadian tar sands following suit, any oil price rebound to even $100 a barrel would once again make these projects profitable, with supply and demand equilibrium returning quickly given the agility of so many of the major oil companies operating in the U.S, according to Ole Sloth Hansen, an analyst at Saxo Bank A/S in Copenhagen.

The comments from OPEC’s secretary general come as yet another display of power, following Iranian claims that the nation could withstand $25 per barrel or that OPEC will allow the markets to decide the price of oil and not intervene by cutting production. However, the latest reports from Davos indicate that, for all of their prognosticating, Saudi Arabia and OPEC may be considering taking action in conjunction with non-OPEC members to remedy the situation as El-Badri has said recently. How this might work in conjunction with global producers’ desperate bids to maintain market share is anyone’s guess, but it does indicate that OPEC’s position may be softening somewhat. Related: Oil Crash Needs A Villain But The Story Is More Complex Than That

Further indication of this comes by way of recent moves within Saudi Arabia, the swing producer and de facto head of OPEC, aimed at not only diversifying resource developments, but also at increasing foreign investment through the construction of Economic cities in combination with the introduction of regulatory reforms to make Saudi more enticing for investors. While the new king has pledged to maintain Saudi Arabia’s policy on oil, in addition to keeping Oil Minister Al-Naimi in his current position, recent news that Saudi Aramco would be investing in gas production as well as the Kingdom’s pledge to invest $109 billion in renewable energy by 2040 highlight that Saudi is adapting its position within the market for the long-term and that a paradigm shift may be taking place within the traditional leader of the oil markets. Domestic oil consumption has doubled since 2000 and reached 3.1 million barrels a day in 2013. If the overall strategy is to maintain or even grow market share, Saudi will need to reduce both its domestic dependence on oil, as well as its current record-breaking deficit to free inventories up for export.

Meanwhile, the U.S. continues to edge ever-closer to lifting the ban on crude exports with news this week of companies such as Enterprise Products Partners, Royal Dutch Shell and BHP Billiton all engaged in export activities and oil major ConocoPhillips awaiting the green light. Shell has approval but has yet to commence exports, BHP Billiton has already sold two cargoes while Enterprise Products Partners is leading the pack. Enterprise has agreed at least two annual contracts to sell light crude condensate at 40,000 barrels per day for a total of 1.2 million barrels a month. The current contracts are with Petro-Diamond Singapore and Vitol and more are expected in the coming year. Should an overall lifting of the ban be introduced, expect a serious shift in global crude oil dynamics as the U.S. and Saudi Arabia up the level of competition within the market through their respective strategies.

By Evan Kelly of Oilprice.com

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  • John Brown on January 27 2015 said:
    Obama was just in Saudi Arabia and we all know he wants $10 a gallon gas in the U.S. The only way oil will stop dropping and go higher for most of this year is if Obama managed to push the Saudis into cutting production. After all Obama wants to hammer the middle class in the U.S. and help Putin and Iran.
  • John Brown on January 28 2015 said:
    ...and Mussolini and The New England Patriots.

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