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OPEC President says the worst of the turmoil is over

Published: 23:57 03 Jun 2016 AEST

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The market was transfixed this week by what happened at OPEC’s first official meeting of the year in Vienna.

Depending on who you talked to, the decision to make no change was already priced in and in early trading on Friday, Brent was holding above US$50 with WTI above US$49 a barrel.

There were probably a number of things that OPEC could have done, but after a couple of hours in a closed door meeting, the decision to leave output unchanged with promises of swift action and a meeting before the end of November if need be, appeared to be the best on offer.

The OPEC President Dr. Mohammed Bin Saleh Al-Sada, Minister of Energy and Industry of the State of Qatar, said that the trend was now more positive.

“The consensus was that the market fundamentals are working, so there was no pressure on on OPEC to adjust production,” he told reporters. 

He added that “the worst is over,” but warned about the need for renewed investment back into the industry.

Saudi Arabia’s oil minister, Khalid Al-Falih, attended his first OPEC meeting since his appointment and offered the notion of restoring the group’s production ceiling to demonstrate Saudi Arabia’s willingness to be a more inclusive member of the organisation.

His country has recently come under severe criticism for acting alone without consideration for other OPEC members.

He said: “We see a balanced market, we see supply and demand converging, we see that we may have started inventory drawdown that will continue for the foreseeable future.”

He also added that he was “satisfied with the price movement over the last few months, and we think it will continue to edge up without much intervention.”  

He made it clear that “Saudi Arabia will continue to play its role, responsible to the needs of the market and the global community”.

Iran’s intentions to continue to increase production back to pre-sanction level was treated with more acceptance at this meeting than before with the OPEC president agreeing that it is their “right.” 

The Iranian minister, Bijan Zanganeh, appeared happier with the outcome of this meeting, telling reporters that “the atmosphere was calm and without tension.”

 The reaction from the analyst community was optimistic as the OPEC strategy appeared to be working with oil up around 80% since January.

Some analysts are extremely bullish on the future of the market with the founder and CEO of New York based Cornerstone Analytics, Mike Rothman, looking towards US$85 a barrel by the end of the year.  Rothman says “global demand for oil is much higher than expected and the oversupply the market talks about is much lower.”

There are still a few risks in the market according to Jason Schenker, president of Prestige Economics. 

“In the second half of the year, OPEC, the central bank of oil, should be looking at China, other commodity price movements and the availability of finance, especially for shale projects in the US market,” he said.

Schenker added that “just as high prices cure high prices; low prices cure low prices.” Schenker has previously warned of the possibility of a recession in the US by the end of the year and this week’s poor employment figures shows little hope of optimism with only 38,000 new jobs in May. The news may cause the Federal Reserve to re-think any interest rate hike in the near future.

 This week’s research note from Bank of America Merrill Lynch Global Research team said “after an astonishing 90%increase in spot WTI prices since mid-February, oil market participants are now starting to focus on the timeframe and magnitude of a potential recovery in US shale output”. 

Aware that not all players can quickly come back to the market, the report says that while “it takes about five to nine months for US shale output to significantly respond to changes in prices, the Permian basin has by far experienced the most dramatic improvements in productivity and seems best suited to capture future capital, should oil prices recover further”.

What was also decided at Thursday’s OPEC meeting was the appointment of a new Secretary General of OPEC, Mohammed Sanusi Barkindo, from Nigeria.

Barkindo is a long-time OPEC veteran, having served as acting Secretary General and holding many prestigious OPEC committee positions over the years. The organisation also agreed accept Gabon as a new member later this year.

The summer driving season has started and sentiment appears to be back on a positive note. OPEC ministers will hope it stays this way until the next meeting at the end of November.

 

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