Oil Will Struggle To Hold $50 in Q4, as Analyst Says Producers Simply Got Demand Picture Wrong

One analyst warns of oil dropping to the low $40s depending on Vienna outcome in November.

The latest bad news for the global oil market moving forward comes from a CNBC survey showing that while oil may average a modest $50 per barrel in the fourth quarter of this year, anything greater than that will depend on the Organization of the Petroleum Exporting Countries (OPEC) not only ratifying its output cap deal but adhering to the agreed-upon limits – which most critics think is impossible.

The survey dovetails remarks made Wednesday by Philip Verleger, president of PKVerleger, that much of the reason for the current pain characterizing the oil market is that producers simply miscalculated demand.

CNBC's informal survey showed that many respondents liken OPEC to a central bank "jawboning oil prices higher by using vaguely worded pledges to intervene," and Eugen Weinberg, head of commodity research at Commerzbank, says this will merely encourage the rise of non-OPEC supply, which in turn will set back the rebalancing process to the second half of 2017 "or later."

Anthony Grisanti, founder and president of GRZ Energy, thinks prices will easily fall into the mid or low $40s if OPEC doesn't deliver on the promises made in Algeria: "Sure, the rhetoric can keep us supported until the [Vienna] meeting in November,  but when the numbers start to come out in December and January and demand drops seasonally anyway, prices are going to fall.

"How many times has OPEC led us down this path?"

To which Victor Shum, vice president of IHS Energy Insight, remarked, "It will be a tall order for OPEC to agree on who will cut what when they meet in Vienna .... individual quota allocations have always been contentious among OPEC members, and there is no evident reason for this to be easier this time around."

For his part, Verleger targets another agency for contributing to the current state of market affairs: he told Bloomberg television that oil producers "got demand wrong because the Energy Information Agency until July told everyone demand was growing at 4 percent, and finally they revised their number to 2 percent."

When a video clip was played of Mohammad Barkindo, secretary general for OPEC, musing that the five-week old U.S. drawdown of inventories "is the new trend," Verleger pointed out that "They don't understand how the market has changed: now there's this swing demand for inventories, which can total up to 2 million barrels per day or more if they manage expectation rights.

"OPEC and almost all of the oil industry totally missed the point that there's something like 4.5 billion barrels hedged."

Many events this week suggest that the OPEC cap deal is doomed to failure, but none more troubling than the disclosure at the World Energy Congress in Istanbul that they are not interested in targeting a specific price for oil – and that their cap would last for a sixth month period only.