The Long Road To Oil Market Balance

Vladimir Putin gave his stamp of approval to an oil production freeze, if not an all-out cut in oil production, joining Saudi Arabia as OPEC and non-OPEC oil producers meet in Istanbul. 

The Russian seal of approval comes as the International Energy Agency acknowledges that a production cut would get the global oil market back into supply and demand balance a lot quicker but if it fails, the IEA warns that the global oil glut could last till mid-2017. The IEA also warns that an agreement to cut production might be counterproductive because it could create more supply down the road as a price of $60.00 a barrel would make all shale producers profitable and a lot quicker.

For oil we are not surprised by the price breaking out and then making a new high for this year and we are not surprised that OPEC and non-OPEC will look to cut production and shore up prices. We predicted that this would happen. Even after Reuters downplayed Russia’s commitment by reporting that the CEO of Russia's largest oil company, Rosneft, Igor Sechin said he was not in favor of cutting output. "Why should we do that?," he asked. My answer is because Vladimir Putin wants you to. That should be good enough.

As we have said since the beginning of the year, oil is at the bottom end of a historic bust cycle that will be followed by a boom. Russia and Saudi Arabia are not afraid that the shale producers will come back at $60.00 a barrel because they believe that global demand will continue to give them an edge and allow them to maintain market share. In the meantime, we see U.S. stockpiles of oil draw down at a record pace in the world’s largest consumer, a sign that the oil market is getting closer to balance. 

The International Energy Agency originally predicted that we would be in balance in the first quarter of 2017 before pushing in back into late 2017 but if we do see OPEC and non-OPEC work together to prop up prices, we could achieve market balance a lot quicker.  There is also doubt about some of the production numbers coming out of Russia as they may be padding those numbers to lock in a higher production number so they can raise output without getting called on it by OPEC and other non-OPEC nations.

We can’t forget natural gas. The futures market jumped to a 22-month high. As I told The Wall Street Journal, falling natural gas production has helped bolster prices. And Hurricane Matthew didn’t cut into demand as much as many expected.

“The market is a little bit concerned that the storage numbers are going to be adequate to get all the way through the winter, with the drop in rig counts signaling that U.S. production is continuing to falter. I think the bears are kind of throwing in the towel.”

And Bloomberg reported, “The warmer temperatures are adding cooling demand.” “The latest forecasts seem to suggest the amount of power outages are not as big as feared” from Hurricane Matthew.