EMEA News
Saudi/Russia Push for Extension Triggers Market Surge - and Skepticism Among Analysts
Even though many respected analysts insist the Organization of the Petroleum Exporting Countries' (OPEC) production cutback has done nothing to improve fundamentals at a time of tepid global demand, Saudi Arabia and Russia in a joint statement cited a "significant positive impact " on fundamentals and "healthy demand dynamics" in declaring their support for a 9 month cutback extension, through March of next year.
Khalid al-Falih and Alexander Novak, the energy ministers for the Saudis and Russia respectively, issued the statement on Monday, causing West Texas Intermediate to settle up $1.01 to $48.85 and Brent to climb 95 cents to $51.79 - and critics to express their doubt about the display of solidarity.
Carsten Fritsch, analyst at Commerzbank, said, "We are skeptical about Russia's willingness to actively participate in any extended cuts"; and Oliver Sloup, director of managed futures at iitrader.com., reiterated a familiar complaint: "We are of the camp that the extension cuts might not be enough - they might need to extend the cuts and to increase them to stabilize this market."
To which Tamas Varga, analyst at PVM, added, "Rhetoric is doing its job, but this must be backed by action in less than two weeks' time."
Without citing specifics, al-Falih told the press in Beijing that "There has been a marked reduction to the inventories, but we're not where we want to be in reaching the five-year average."
The statement reads in part, "The two ministers agreed to do whatever it takes to achieve the desired goal of stabilizing the market and reducing commercial oil inventories to their 5 year average level, as well as to underscore the determination of oil producers to ensure market stability, predictability and sustainable development – the joint actions of the participating producers should be extended by 9 months, through March 31, 2018."
In a separate press conference in Beijing, Russian president Vladimir Putin noted that "It's right that the decision was made not for two, three, four months but for nine months; that is the most important condition for stability."
However, instead of declaring his full support he went on to say there's a "good chance" that his nation will follow through on the extension.
For the record, Mohammed bin Hamad Al-Rumhy, oil minister for Oman, on Monday said he fully supports the Saudi/Russian declaration.
As for where prices may now be heading, Helima Croft, global head of commodity strategy for RBC Capital Markets, believes if WTI can crack $51 it could break out into 2017 highs of $55 per barrel, but she told CNBC that "Right now we are in this sort of $50-$55 range because, yes, OPEC is willing to do whatever it takes, but [U.S.] shale production is also an issue.
"This is the push-pull of the market right now."
With more of the same from OPEC now seeming a distinct possibility, it's worth noting that the initial cutback deal has been fraught with problems, starting with the contention that the depth of the cuts simply isn't enough to significantly reduce the global glut; also, the minimal gains of the cutbacks have been mitigated not only by increased U.S. shale production, but renegade production from Iran, Iraq, and a host of smaller OPEC members.
And despite the Saudi/Russian observation of healthy demand dynamics, Kho Hui Meng, president of Vitol Asia Pte., last week pointed out that while consumption has been forecast to expand this year by 1.3 million barrels per day (bpd), in reality this has so far translated into a lukewarm 800,000 bpd.
