Brent crude climbs on output freeze hopes

August 19, 2016

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Oil prices climbed back above $50 a barrel this week, registering a third straight week of gains, after Opec members and other large producers said they would discuss freezing output.

Plans to try and accelerate the long process of bringing supply and demand back into balance have been boosted by Opec kingpin Saudi Arabia and Russia — the biggest exporter outside the cartel — saying they will discuss “possible actions” to stabilise the market when oil ministers convene on the sidelines of a conference in Algeria next month.

While many traders and analysts are sceptical a deal will be reached, with tensions between Saudi Arabia and Iran just as acute as when they scuppered a similar proposal in April, the talk has been enough to relieve pressure on a market still struggling to clear a two-year-old glut.

Brent crude oil, the international benchmark, has gained almost 20 per cent so far in August and on Friday hit $51.22 a barrel, its highest level in two months, before easing. It was below $42 a barrel in July as traders fretted that the massive build up in oil inventories was seeping into fuels like gasoline as refiners turned too much cheap crude into fuel.

“Oil prices are vulnerable to attacks from short-sellers when seasonal surpluses emerge, as was the case recently when [US] gasoline inventories unexpectedly rose”, said Daniel Hynes, senior commodity strategist at ANZ bank in New Zealand.

“It’s clear Opec saw the weakness in oil prices in July as unwarranted and this forced its hand. However, instead of having to cut output, verbally intervening has achieved the same impact.”

While oil prices have bounced and are well above the sub-$30 a barrel they hit in early 2016, they remain at only about half the level they averaged between 2010 and 2014, before rising US shale oil output triggered global competition between producers.

There appears to be no end in sight for that battle for market share,

Saudi Arabia, which has led Opec’s policy of keeping output high with the aim of curbing output from higher-cost producers, raised its supplies to a record level in July and has .

Iran’s output has jumped following the removal of most sanctions tied to its nuclear programme earlier this year. Meanwhile, Iraq’s exports are near a record and it plans to send more oil through the Kurdish north. Combined, these gains have overshadowed falls from Nigeria and Venezuela, two of Opec’s weakest members.

While production outside the cartel is also expected to decline this year, the recovery to around $50 a barrel may also allow some private companies to drill more wells or lock-in better prices for the coming year. Oil that was has also started to sail to customers as prices have risen.

Olivier Jakob of Petromatrix in Zug, Switzerland said prices could fall back given the low probability of Opec agreeing a freeze, with contracts for delivery in late 2017 at a near $5 premium.

“Producers should consider hedging . . . a part of their forward production at current price levels,” Mr Jakob said.

Oil has also been boosted by a weaker US dollar, which makes commodities cheaper for holders of other currencies and can influence hedge funds, who had built up a big bet against crude in June and July.

Category: Oil & Gas