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Oil price not following the script as market overhang persists

Published: 00:53 01 Apr 2017 AEDT

Picture of oil rigs out at sea

As we close the first quarter of the year, the oil story hasn’t played out according to the optimistic script in place a few months ago.

The price is range-bound with the bears appearing to own the space and talking the market down as investors fear there’s no end in sight with the over-supply in the market.

In early trading on Friday, Brent crude was priced above US$52 with WTI holding on to US$50 a barrel.

Momentum subsided after short rally....

After a short rally earlier in the week, momentum subsided due to ongoing uncertainly in the market.

Analysts say this has been the worst performing quarter since 2015.

Among other asset classes on the stock market, Brent crude futures have made huge losses.

Sentiment was high at the beginning of the year and OPEC appears to be doing the right thing.

Much oil has been removed from the market, an estimated 1.5 million barrels, but as supplies decline from the OPEC, non-OPEC committed group, the American suppliers are adding more supply to the market. 

Anyone with a basic knowledge of economics or mathematics knows that’s not a sustainable scenario.

Downside could be limited..?

Depending on who you talk to, the downside could be limited.

The president of Prestige Economics in Texas, Jason Schenker is more optimistic and says: “oil prices are likely to rise in 2017, while underinvestment poses further upside oil price risks for 2018.”

Demand remains robust but the market needs to remove the excess inventory.

Speaking on Bloomberg TV, Woodside Petroleum (ASX:WPL) chief executive, Peter Coleman said he’s looking at an average of US$50 a barrel oil price this year to suit his budget, but the fundamentals need to shift.

“There’s such an overhang in the market, it’ll take a while to work it off,” and he adds that he sees the price range moving between US$45 to US$60 a barrel this year.

The US oil rig count will be released today, but already it’s up more than 68% year-on-year to currently stand at 652 rigs.

Compliance to the OPEC agreed cuts remains surprisingly high.

The OPEC monitoring committee met last Sunday and most analysts believe that indications look positive for a renewal of the OPEC agreed cuts.

Schenker says he sees the “continuation of the OPEC production cut increasingly likely” at the OPEC May meeting. 

The Iranian Oil Minister Bijan Zanganeh said he believed that the global oil cut agreement could be extended. The internal lobbying will be increased in coming weeks to influence a unanimous agreement when OPEC meets at the end of May.

The Russian energy minister, Alexander Novak spoke to CNBC on the sidelines of the International Arctic Forum this week and said he’s seeing a “gradual stabilization of the market, an increase in market demand with reserve growth falling each week.”

He estimates that 1.5 million barrels has already been taken off the market and praised the “overall compliance fairly high at 94 percent.” 

When asked about Russia’s 100 percent compliance, he said reduction was happening in stages.

“The decrease was ahead of the tempo with regards our initial plans,” and he adds that he expects the Russian reduction of 300,000 barrels will be completed by the end of April.

When asked about an extension of the production cut agreement, he said: “..the possibilities of the agreement being extended by another half year are embedded in the agreement itself,” but adds that any extension to the agreement needs to be sanctioned by the OPEC ministers in May and with all 24 countries who are signatories to the agreement.

While the short-term money may be going into quick turn-around US projects, many analysts say the lack of investment in recent years has added greater risk to the prospect of a supply crunch in the future.

Very few mega projects..

Very few mega projects are starting up, and while the International Energy Agency observed some investment coming back to the market earlier this month, it acknowledged that it was probably not enough to eliminate a risk of market tightness in years to come.

The IEA estimates that most investment will happen outside of OPEC in coming years.

India joined the IEA as an associate member his week, building on relations outside the OECD with other countries like China, Indonesia, Thailand, Singapore and Morocco. 

The IEA director Fatih Birol pledged to expand the influence of the IEA when he took office.

“This is a major milestone in the development of global energy governance, and another major step toward the IEA becoming a truly global energy organization, strengthening ties with the key energy players that make up the IEA family."

The next few weeks are crucial for the oil market as OPEC ministers and colleagues begin to weigh up global oil flows and production numbers.

Schenker believes “the imminent start of the US summer driving season presents upside risks for oil prices;” a factor that may just give the industry a much-needed demand boost, at least in the short term. 

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