Oil markets: Did St. Petersburg achieve what Vienna could not?
After several weeks in bear market territory, oil prices were finally on the up after Monday’s meeting of the Joint Ministerial Monitoring Committee (JMMC). The question is why sentiment has changed, and whether we have reached the long-awaited inflection point where markets are starting to balance.
The JMMC was set up to monitor the state of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC deal reached last December, which aims to reduce crude production by 1.8 million barrels per day (bpd) in order to stabilize oil markets.
The deal initially saw oil prices soar close to $60 in January. It later levelled and traded in a comfortable range between $50 and $55 per barrel. Compliance with the deal targets ramped up steadily and reached more than 100 percent by May.
However, when markets failed to balance by mid-spring and US inventories kept on rising, the bears were out in force. So much so that when the production-cut deal was renewed for another nine months during an OPEC meeting in Vienna in May, the oil price tumbled. The reasons were manifold, but reflected the slower-than-expected pace at which markets were coming into balance.
Markets also reacted to higher production from shale oil producers in the US. The rig count as of today is 950, which is more than double compared to last year. Rig productivity is more than twice that of two years ago. This resulted in an increased US production of close to 600,000 bpd this year, according to OPEC data, although shale production recently slowed. Additionally, Libya and Nigeria increased their production by 700,000 bpd in May and June alone.
All of this did nothing to calm markets, despite rosy demand forecasts. Global oil demand is expected to rise by between 1.3 and 1.4 million bpd in both 2017 and 2018. The global economy is humming, so there is little danger of a downward revision in those numbers.
The boost in oil prices early in the year was good for OPEC compliance, because producing countries’ revenues were going up despite smaller volumes sold. This was particularly profitable for Russia, which cut 300,000 bpd, with production of around 11 million bpd after cuts.
As prices began to slide, compliance slipped to 78 percent, according to the Paris-based International Energy Agency (IEA). This was mainly because of the equation, in which higher oil prices more than compensated for lower volumes, no longer working out.
The Joint Ministerial Monitoring Committee meeting on Monday saw some tangible results, despite low expectations.
Therefore all eyes were on the recent St. Petersburg meeting of the JMMC. Unlike with the Vienna meeting, expectations were low.
But the meeting produced some tangible results: Saudi Arabia agreed to limit exports to 6.6 million bpd, which is roughly 1 million below last year’s volume. Nigeria agreed to a production cap at around 1.8 million bpd.
At the same time global inventories have fallen by 90 million barrels since the start of the year. On Wednesday the positive news got another booster from the US Energy Information Agency (EIA), when it released the weekly inventory numbers. The balance was positive; US stocks were down 7.2 million barrels in the week ending July 21, beating analyst expectations by far.
The question is whether we have reached an inflection point, and whether we shall see a sustained recovery. The big three energy agencies — OPEC, IEA and EIA — all predicted that oil markets would come into balance some time this year. The date was pushed back from the second quarter to the second half of 2017, if not the beginning of 2018. It was clear that the rebalancing would take place; however it was never going to be smooth sailing, given the huge overhang of global crude inventories.
Since OPEC embarked on its proactive measures aimed at rebalancing the markets last December, Saudi Energy Minister Khalid Al-Falih has mentioned time and time again that inventories would come down, but that they would do so gradually and over time. It was always going to be a marathon, never a sprint.
The St. Petersburg meeting seems to have moved the needle. Producers and consumers will benefit from crude prices moving back into the comfortable range of between $50 and $55 per barrel over a sustained period of time. Investors and consumers like predictability, traders like volatility, and markets are psychological. Therefore be prepared for peaks and troughs. We may have to push the repeat button once or twice.
• Cornelia Meyer is a business consultant, macroeconomist and energy expert. She can be reached on Twitter @MeyerResources.