EMEA News
Analysts Cite Geopolitics As a Major Factor for Crude as Doubt over OPEC Extensions Causes More Market Losses
With the certainty previously exhibited by traders rapidly turning to doubt with regards to the Organization of the Petroleum Exporting Countries (OPEC) extending its production cuts through to the end of next year, crude prices on Thursday fell again for a third straight session - and analysts disagreed about whether the market has priced in the extension for 2018.
West Texas Intermediate fell 19 cents to settle at $55.14 per barrel, Brent slid 51 cents to $61.36 - this despite Khalid Al-Falih, energy minister for Saudi Arabia, stating on Thursday that OPEC and its allies should announce an extension when they meet on November 30.
Russia earlier this week rattled nerves by sending mixed signals about the likelihood of an extension and its commitment to it, and Michael Poulsen, an analyst at Global Risk Management Ltd., said, "There's now just a 50-50 chance of an announcement coming after this meeting, and I wouldn't have said that even a week ago; it is suddenly a very mixed picture."
Rob Rhummel, portfolio manager for Tortoise Capital Advisors, expressed optimism that the extension would go ahead and that there's room for prices to go higher because it hasn't been priced in yet; he added that everything from Venezuela's humanitarian crisis to the potential resumption of sanctions against Iran could "endanger supply that potentially pushes prices even higher."
By contrast, Ted Seifried, vice president and chief market strategist of Zaner AG Hedge, told Bloomberg television that the oil market is indeed pricing the extended OPEC cuts in 2018; and Jason Gammel, equity analyst at Jefferies, noted that "there is quite a bit of expectation" going into the OPEC November 30 meeting, and that crude "could get a bit of a correction" - however, he believes "are still strongly supportive of the higher oil prices" both in terms of supply and demand.
Although Rhummel's mention of geopolitical risk was almost an afterthought as he discussed the market with Bloomberg, Amrita Sen, chief oil analyst at Energy Aspects, thinks it is worthy of serious consideration because "there is no oil inventory buffer anymore: OPEC spare capacity is a lot lower, and that's why geopolitics matters.
"If you think about the last three years, we've hardly had any geopolitical premium in the price but now, because we don't have a buffer, geopolitics will matter a lot more, which can lead to spikey-ness in oil prices next year."
As for the risks that matter the most, Sen said, "Even if there is a flare up in Iran (with Saudi Arabia) we don't see exports and production being lost, but Iraq is probably a bigger issue right now with the dispute between Baghdad and Kurdistan, we have lost a decent chunk (of output), about 300,000 barrels per day of volume from the north (of the country); in Venezuela too, production is absolutely plummeting,"
For her part, Sen believes OPEC will announce an extension later this month because "the stakes are too high: the market is expecting it and if they don't do anything prices could fall sharply."
That much was said earlier this week by Harry Tchillinguirian, head of commodity-markets strategy at BNP Paribas SA: he warned that "Any postponement in deciding a supply cut extension, or even a disappointment relative to the duration of the extension, can easily lead to unraveling of speculative length on futures and a price correction."
