Despite challenges stemming from the COVID-19 pandemic, miner Antofagasta maintained its full-year 2020 copper guidance.
Tag: Brent Crude
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The Organization of Petroleum Exporting Countries’ first agreement to cut oil production since the financial crisis — reached at a meeting in Algiers last week — can be seen as something of both.
The market reacted positively to news of an output cut, with both Brent Crude and West Texas Intermediate surging 6% before a little profit taking took over. Not surprisingly, oil company shares also perked up with some smaller oil companies up 7-10%.[caption id="attachment_81167" align="alignnone" width="300"] Source: The Financial Times.[/caption]
The gist of the agreement, such as it is, is to cut production to 32.5-33 million barrels a day with seemingly all OPEC members agreeing, in principal, to the plan and some non-OPEC members like Russia giving cautious support, essentially saying “if they stick to it we may make some modest cuts, too.”
How Strong an Oil Price Deal is This?
A major breakthrough? Well certainly a much more positive and unified position than came from the last meeting in April which collapsed in acrimonious dispute particularly between Saudi Arabia — the architect of the current glut — and its regional arch rival, Iran. Clearly, behind the scenes, some form of agreement has been reached with Iran that they will be allowed, when the final quotas are agreed in Vienna on November 30, to pump close to 4 million barrels. This was the magic number Iran was producing before sanctions and some say is probably all they could produce with current infrastructure and technology, anyway.
The problems are manifold but two stand out. First, there is as yet no agreement as to who cuts and by how much. OPEC pumped 33.24 million bpd in August, so they are aiming for a reduction of 240,000 to 740,000 bpd from this agreement.
The lower end of the range would not be enough to tighten the market from a supply and demand point of view, the upper end might, just barely, if the numbers that members actually pump are to be believed and if a rise in prices that may result does not encourage a surge in U.S. shale production, much of which has innovated and invested to the point it is profitable even at current prices.
Oil analysts believe between 700,000 and 1 million bpd needs to be taken off the market to have a meaningful impact on global supplies and prices. Still, sentiment is a powerful driver of prices and anything the market believes is north of half a million reduction may be enough to lift prices in 2017.
Who Gets Cut?
The next problem is who cuts and by how much. The production range is said to be to allow for a recovery from war and terrorist-ravaged production in Libya and Nigeria, both of which have suffered this year but have the potential to produce more. Rather than Iran being the fly in the ointment, this time it could be Iraq.
According to the Financial Times the Iraqis are saying the current estimates of what they are pumping is too low. In practice, they are pumping 300,000 bpd more than secondary sources suggest, meaning if they are given a cap it is likely to be well below where they really are and they will refuse to accept it.
Meanwhile, those very resourceful shale drillers are still producing at prodigious rates in spite of Saudi Arabia trying to bankrupt itself to stop them. U.S. production has dropped by only about 10% since late 2014, but the companies that have survived are now leaner and more efficient. It would not take much of a price rise for investors, with scant few opportunities elsewhere to invest, to plow back in to the sector and drilling in the U.S. to pick up.
So, before you scramble to hedge your energy price exposure you may want to give it a few weeks for this “agreement” to unfold. There is plenty of scope for it to unwind before it is ever formally agreed. The devil as they say, remains in the details, and that won’t be worked out until November 30 at the next OPEC summit.
There is a delicate game of cat and mouse, feint and counter feint, smoke and mirrors going on among oil producers universally suffering from low oil prices.
On the one hand we have Saudi Arabia, the architect of the current low-price environment which started pumping oil at record levels specifically to grab market share in the face of growing U.S. shale production and the return of archenemy Iran to the market after years of sanctions. The low prices that resulted have caused pain for all producers and driven some heavily oil-dependent economies to the brink of collapse.
Talk of a production freeze in the early part of this year got everyone excited and the crude price rose, only for Saudi Arabia’s powerful deputy crown prince, Mohammed bin Salman, to throw cold water on the idea if Iran was not willing to be a part of any coordinated freeze.
The Arabian Stallion and the Russian Bear
Since then, all parties have tried to tough it out. Saudi Arabia, with the largest sovereign wealth fund, has managed to maintain appearances but is still trimming budget deficits, burning through reserves and talking of selling its crown jewel, Saudi Aramco.
Russia has been partly shielded by a collapse in the value of the ruble that has partially compensated domestic budgets from low crude prices but is still desperate to achieve higher returns. Some 40% of the country’s revenue comes from oil and natural gas and the economy has languished in recession territory for the last two years.[caption id="attachment_80753" align="alignnone" width="300"] Source: Financial Times[/caption]
It has taken five months but all the parties are now maneuvering to have another go at a production freeze in the hope that it will push up prices. Talk of a “task force” pact between Russia and Saudi Arabia was enough to drive the oil prices up in a matter of minutes last week.
The price rallied from around $46.50 a barrel last Monday morning to just below $49.50 but quickly fell back below $48 a barrel within minutes of a joint statement from Moscow and Riyadh which said the group’s first meeting would not take place until October.
Saudi Arabia’s oil minister Khalid al-Falih has officially maintained the position that any freeze must include Iran and has denied any discussion is taking place to agree a freeze, but Russia’s Energy Minister, Alexander Novak, said talks were ongoing and went further to say Iran should be given a special dispensation to raise production to pre-sanction levels before being asked to take part in a freeze.
What Can Iran Do?
This may be easier to achieve than in the past. Iran is already at 3.85 million barrels per day and only just exceeded 4 million barrels before the sanctions were applied, so it is almost there. Indeed, there is much speculation that Iran cannot raise its production any further in the short term without significant outside technology and investment, so it would be a token capitulation for them to agree to freeze at, say, 4 million barrels. If that cleared the way for a “freeze” by OPEC and non OPEC producers like Russia that may be all that would be required to cause prices to rise.
Price Comeback? Don’t Count On It
Don’t for a moment, though, think that means a return to $100 per barrel. The world is still awash with oil. Saudi and Russia would be freezing production at record levels, Iran and Iraq are each producing around 4 million barrels a day much of which wasn’t there a couple of years ago and any significant rise in price will see a resurgence in U.S. shale oil production into an oversupplied market.
U.S. Department of Energy data showed high levels of oil stockpiles. Commercial crude oil stocks rose 2.5 million barrels to 523.6 million barrels, signaling a persistent supply overhang according to the Financial Times. Think more like $50-60 as a range. The Russian’s have said they would be happy with that in the short term, and it would represent a 20% increase in revenues from this year’s levels.
Still, these talks look more widely supported than the abortive discussions earlier this year, not least of which because Russia is involved. All parties are feeling the pressure and that is encouraging some investors and analysts to think this time it will be different.
Should End Users Stockpile Fuel?
Those exposed to oil price inputs should be wary. Volatility on a day-by-day, or week-by-week basis is likely to be the order of the day for the balance of this year. All parties are playing a delicate game of talking up the market without giving anything away to other producers in terms of agreeing to a freeze for themselves, but allowing others off the hook. In such an uncertain situation, rumor and expectation drive markets, as we have already seen over the last few days.