Croft Focuses on Peak Demand as Rumour Grow About a Six Month OPEC Cutback Extension

Wednesday September 13, 2017

Forget about worries over peak production and focus instead on peak demand: this was the message delivered Tuesday by Helima Croft, chief commodities strategist for RBC Capital Markets, in assessing the current state of the crude market and if the Organization of the Petroleum Exporting Countries (OPEC) should extend its output reduction agreement beyond March of next year.

Croft told CNBC that the perception of having reached the limit of demand is weighing down crude prices, a phenomenon influenced by factors such as reports of increased electric car usage and policies such as those in France intended to ban vehicles powered by petroleum and diesel.

She said, "For U.S. shale producers…when it's $45 no-one is really happy, but you get to $50 and they're willing to hedge their production, so there's a question of 'is this a cap on near-term prices'?",

Croft went on to note that while the key objective of OPEC was to push prices above $60, including countries such as Kazakhstan in the deal is a "lost cause" because "They sign up and keep pumping."

But if Croft was exposing the fundamental weakness of a cartel that has repeatedly promised to return supply and demand to normal, it was lost on traders who, on Tuesday, were reportedly excited enough about talk of an extension beyond the previously contemplated three-month term to push  West Texas Intermediate up to $48.40 per barrel; Brent climbed 43 cents to $54.27.

Kyle Cooper, director of research at IAF Advisors, said OPEC extending its cutbacks is "bullish in the sense that they are willing to do it, but it's effectively bearish that they have to."

As with so many things related to OPEC, rumour is causing traders to act: people familiar with the matter told Bloomberg that the cartel is mulling over a prolonged extension: one option under discussion is a six-moth extension, to be enacted only in a worst-case scenario.

Bjarne Schieldrop, chief commodities analyst at SEB AB, said that the production pace of Libya and Nigeria as well as U.S. shale means "there will be plenty of oil in 2018 with the need for OPEC to hold cuts through all of next year."

With talk of an extension rapidly becoming the favoured issue within the analytical community, Mohammad Barkindo, secretary general for OPEC, is busying himself doing what he does best: painting a rosy picture of his organization's activities.

He said in a speech to Oxford delegates, "It is clear the rebalancing process is under way, supported by the high conformity levels of OPEC member countries and participating non OPEC countries," and he added that a rise in demand of close to 2 million barrels per day (bpd) in the second half of the year relative to the first will help get rid of excess oil in storage.

Earlier this week, Saudi Arabia was said to be pushing for a cutback extension, just as Iran bragged that it will reach an oil production rate of 4.5 million bpd within five years.