Oil market rally under threat as Doha meeting fails to agree

Oil markets


Naimi Apr16

Yesterday’s failure of the Doha oil producers meeting will hopefully reintroduce a note of sanity into oil markets.  After all, Saudi leaders have made it clear, time and time again, that they were no longer interested in operating a cartel where they take the pain of cutting production, and everyone else gains the benefit of higher prices.

Veteran Oil Minister Ali al-Naimi was quite explicit about this a year ago, saying that:

Saudi Arabia cut output in the 1980s to support prices. I was responsible for production at Aramco at that time, and I saw how prices fell.  So we lost on output and on prices at the same time.  We learned from that mistake.”

And there was a very clear statement from the deputy Crown Prince last Thursday, which made it abundantly clear there would be no deal at yesterday’s meeting:

“If all major producers don’t freeze production, we will not freeze production”

As Iran was never scheduled to attend the meeting, surely it was obvious that no deal was possible?

The Saudis have also been very clear about why they have adopted this new policy.  They recognise that oil, like coal, will end up being left in the ground.  So it makes no sense for them, as the world’s lowest-cost producer, to provide a price umbrella that enables higher-cost producers to monetise their oil at Saudi’s expense.

Naimi has been saying this for years, to anyone who would listen, telling reporters in 2012 in Qatar that Saudi policy was based on the fact that:

“Demand will peak way ahead of supply”

The same message was repeated earlier this month by Saudi’s deputy Crown Prince, who told Bloomberg that the country was now planning for the post-oil world and highlighted:

“His obsession with moving the Saudi economy away from oilAramco’s new strategy will transform it from an oil and gas company to an energy/industrial company”.

Despite these clear statements, oil prices have rallied 50% since January.  But lets be clear.  This move was never based on the improbable idea that a production freeze by Russia and some OPEC members (excluding Iran and probably Iraq), would somehow change today’s 2mbd surplus of oil into a more balanced market.

In reality, the real story has been buying of oil market futures by financial speculators.

They realised during January that the US Federal Reserve was unlikely to follow through with its proposed 4 further interest rate rises in 2016.  So they decided to rewind the clock, and buy up commodities such as oil and copper – repeating the “store of value” trades that were so profitable during the post-2009 US$ devaluation period:

  • At its peak in 2013, $80bn had been speculatively invested in this trade
  • Pension and hedge funds knew that a key purpose of the Fed’s easy money policies was to devalue the dollar
  • And so it seemed obvious that commodities such as oil and copper would do well as potential “stores of value”
  • China’s stimulus policy, which peaked in 2013 at $28tn/year, also artificially boosted commodity demand

And as I noted 2 weeks ago, by the end of March, the funds had built a record long position of 579m bbls in Brent/WTI – equivalent to almost 6 days of global demand

But as the futures market data showed then, the smart traders were already banking their profits and moving on to new opportunities.  The Doha story had done its job, as far as they were concerned.  And they knew that in a weak market, profits come from “buying on the rumour, selling on the news”.


My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 58%
Naphtha Europe, down 57%. “Asian price gains were capped by a rising supply of arbitrage material for May at a time of receding Chinese demand for May delivery”
Benzene Europe, down 54%. “Europe remains the highest-priced region for benzene….US Gulf material is now being fixed for export to Europe for May onwards as Asian styrene numbers weaken.”
PTA China, down 40%. “Prices were assessed as mixed week on week, as choppy upstream energy prices caused prices to be volatile.”
HDPE US export, down 31%. “China market outlook is bearish due to reduced buying interest.”
¥:$, down 6%
S&P 500 stock market index, up 6%


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