Average Oil Price Would be Same With or Without OPEC Deal, says Fesharaki

FGE says prices for 2017 will be locked in a $50-$60 band.

The Organization of the Petroleum Exporting Countries (OPEC) may have brought a certain degree of stability to the market via its oil production cutbacks, but the initiative hasn't had any impact on the average price of crude: that is the contention of Fereidun Fesharaki, founder and chairman at FGE, who told media that average crude prices would be the same with or without the deal.

Speaking on Bloomberg television, Fesharaki said, "If there was no OPEC, the prices would have gone down to $30-$40 and then gone to $70-$80 and then back down again to $50-$60, so what OPEC is doing is putting a band: the average price with or without OPEC would be the same, but OPEC is putting a band, and this band is $50-$60."

Fesharaki added that the price range is manageable because of "very strong" demand growth (which he says is coming from China at 350,000 barrels per day and revolves around gasoline): "Without the demand growth, this would be impossible."

Fesharaki went on to say that the rise of U.S. shale has put a cap on prices, but he disagreed with the suggestion that it is the sole swing producer of the industry, pointing out that the designation must also be shared by Saudi Arabia

Fesharaki forecasts that since OPEC has a vested interest in maintaining the band (because anything above $60 would create a lot of new competition and demand would wither) crude prices will reach $60 per barrel  at the end of this year compared to the $50-$55 range of the first six months.

While Fesharaki concedes that the market is not yet comfortable with a $50-$60 band, Nicholas Koutsoftas, co-portfolio manager of commodities at Cohen & Steers Capital Management Inc., told Bloomberg that "We're very comfortable with $60 to $65 range by year's end.

"If they hold on, OPEC could reach their goal" of seeing OECD inventories returning to their five-year average.

Even though Fesharaki and Koutsoftas appear to be mildly optimistic - or at least hopeful - in their outlooks, John Kemp, market analyst for Reuters, notes that for the time being at least, hedge funds have stopped buying, and that "flat prices and calendar spreads have been softening as the short-covering cycle is completed and amid growing doubts about whether OPEC's output cuts are draining crude oil stocks."

To which Mike Wittner, head of commodities research at Societe Generale SA, added, "It looks like those new bullish positions added over three weeks are what are known as weak longs.

"It looks like they exited later in the week, accelerating the market move lower; the managed-money players get in and out of the market so fast now that it will make your head spin."

To many respected analysts, even a $60-$65 price range for crude seems overly optimistic: although it described fundamentals as being "surprisingly good," Goldman Sachs last week maintained a sequentially higher Brent forecast of $59 per barrel, while Julius Bear predicted a $45-$55 trading range over the next six months.