Oil price soar as much as 15% higher upon Russia’s maneuvers

The Week

The oil price surged nearly eight per cent to above $35 a barrel yesterday, ending a fourth consecutive session higher and heading for its second consecutive week of gains, as speculation grew over a deal to cut supplies.

Excess output, currently estimated at a minimum of one million barrels a day, has persisted for at least 18 months and dragged prices to 12-year lows of around $27 at the beginning of last week. At anywhere around its current levels, oil is at “irrational” lows, below even the cost of extraction in many areas, but remains in the thrall of sentiment on production.

It is a shift in this sentiment that has driven the ongoing rally. Hints from a Russian oil executive on Wednesday of a rapprochement with Saudi Arabia on cutting exports were apparently confirmed yesterday, as Russian energy minister Alexander Novak said the Opec cartel had floated the idea of a coordinated five per cent reduction to be discussed next month.

“Saudi Arabia remains committed to the balance of the market and is willing to cooperate with others to stabilize the market,” a Gulf Opec official familiar with Saudi thinking told the Wall Street Journal. “All options will be considered and the doors are open.”

The Journal adds that, according to International Energy Agency figures, Russia produced 11.1 million barrels a day of crude oil and liquid fuels in 2015, and Saudi Arabia pumped 10.1 million barrels of crude a day. As such, “a five per cent production cut by just Saudi Arabia and Russia would be sufficient to bring the market close to balance,” analyst Jefferies said in a research note quoted by Reuters.

Very strong doubts remain over whether a deal will be reached, however, as Saudi Arabia also has an eye on output from its supposed Opec partners Iraq and Iran. Confusion over whether the offer to Russia came from Saudi Arabia or other members of the cartel such as Venezuela or Nigeria has tempered oil’s momentum, dragging Brent crude to around $34 a barrel this morning.

Overall, analysts are warning that the heavy reliance on fragile sentiment is introducing a lot of volatility to prices that could catch traders out.

“Right now, we’re entering a phase where rumours are going to move the market 15 per cent,” said Todd Gross, the chief investment officer at QERI LLC. “You have to be really careful.”

Oil price: Russia blinks first – is the slump coming to an end?

28 January

The oil price jumped significantly overnight and held higher as the first concrete signs that big producer countries might be willing to cut supplies buoyed brittle sentiment.

International benchmark Brent crude had been steady yesterday at $31 a barrel, around which it has been hovering for most of the week. Then, overnight, it rallied to in excess of $33 and had settled above this threshold in early London trading this morning.

This is still a brutal low that renders much global production loss-making, but it is a big improvement from the near 13-year low of $27 reached last week after a new year slump of more than 20 per cent. It also means the price has continued a tentative rally that is moving it further away from ultra-bearish forecasts of below $20 and as low as $10.

Sentiment is being shifted by hints that big supplier nations may finally be prepared to agree an end to an internecine turf war and cut production, which would ease the pressure on a heavily oversupplied market. The most promising sign yet of a policy shift came in the form of comments from a Russian oil executive yesterday.

Nikolai Tokarev, the head of Russian oil pipeline monopoly Transneft, said “an oil executives and government officials meeting in Moscow on Tuesday had reached the conclusion that talks with Opec were needed to shore up the oil price”, says CNBC. Saudi Arabia has consistently said it will not cut supplies unless big non-Opec producers – and especially Russia – move first.

There is a long way to go before this translates into a cut in supplies – and there is a lot of scepticism that a workable accord can be reached. That formal meetings within government are finally yielding unequivocal statements of the need to cohesively cut supplies is a major step forward, however. Output cuts by global oil powers are realistically the only thing that will help prices rise.

Should the apparent rapprochement between the two main global oil powers run out of steam, the ongoing supply glut could still undermine the rally.

Reuters notes official data yesterday showed US domestic crude oil reserves surged 8.4 million barrels last week, far more than analysts had anticipated. Elsewhere, Saudi Arabia’s deputy minister for company affairs at the Ministry of Petroleum and Mineral Resources said that international excess supply is probably running at a hefty two million barrels a day.

Oil price: why we could yet ‘see more fireworks’

27 January

The oil price endured wild swings on Tuesday, rising more than six per cent at one point to above $32 a barrel and touching session lows below $29.

Both the international and US benchmarks are extremely volatile at the moment as the determination of many analysts that painfully low and loss-making prices must soon turn higher runs up against stubborn negative sentiment on excess supplies. A sustained recovery remains unlikely until there is at least some movement from larger producers on output.

In a sign of how desperate the market is for just such a sign, the intra-day surge recorded yesterday was prompted by the vaguest of hints of greater cohesion from rival oil powers Saudi Arabia and Russia – Iraq’s oil minister said at an energy conference that he saw signs the two were more “flexible” on supply cuts, reports the Wall Street Journal.

But optimism off the back of the comments was short-lived. “We consider the likelihood of any agreement between these parties as extremely low,” ANZ Research said in a note to clients.

Saudi Arabia has repeatedly refused to curb its production without action from others and Russia has been shown to be pumping at record levels. Add a post-sanctions Iran and record output from Iraq itself into the mix and you have a recipe for the supply glut continuing through this year.

When attention returns to existing oversupply, prices fall. Overnight data from the American Petroleum Association revealed a big rise in US domestic crude oil reserves of 11.4 million barrels, notes Reuters, with official figures due to be published later today. Ahead of this, global price barometer Brent crude was steady at a still-low $31 a barrel.

“This is a mega build as a result of refinery maintenance season. There can only be more weeks like this ahead,” said John Kilduff, a partner with Again Capital. “We’re going to see more fireworks.”

This sense that the bearish sentiment on supply would continue to hold sway was reflected in a new forecast from the World Bank, says The Guardian. It has reduced its average price prediction for 2016 from $51 to $37 a barrel.