Saxo Bank: OPEC harmony returns – for now

The drive towards balancing the market hinges on rising demand growth and the reduced supply from non-OPEC producers not least in the North America, said Ole Hansen, head of commodity strategy at Saxo Bank, speaking to Trend June 6.
OPEC produced an estimated 33.2 million barrels per day during April, some 1.7 million more than last year, he said.
“The 169th meeting of OPEC came and went without the usual disagreements that we have grown used to,” added Hansen. “Talks prior to the meeting of a new production ceiling being introduced failed to materialize. But with the market already well on the way to balance, the need for new initiatives at this meeting was unnecessary.”
“Instead we saw the new Saudi Energy Minister Khalid al-Falih embark on a highly successful public relations exercise,” he said. “This helped to win over several under pressure producers looking for new initiatives to boost the price even further. With the re-balancing process well underway, courtesy of mostly involuntary supply disruptions and slowing production from high cost producers outside OPEC, this was not the time to rock the boat.”
The Saudis can rightfully claim that “the pump and dump strategy” has been successful in the sense that market shares have been restored, said Hansen, adding that billion dollars worth of capex reductions from oil majors across the world will help support the price of oil return to a higher, longer-term and more sustainable level over the coming years.
“However, before we get that far, the overhang of more than one billion barrels of global supplies and the expected resumption of supply from Canada and Nigeria will make it difficult for oil [prices] to rally much further in the short term,” he said.
“Increased hedging activity from high cost (shale) producers in the US does indicate that an oil price rally much above $50 could be counterproductive towards the efforts of creating balance in the market,” said Hansen.
As for Iran, Hansen said, the country has a long-term target of producing 4.6 million barrels per day compared to 3.5 million barrels per day in April and just 2.8 million barrels during the years of sanctions.
“Such a statement [of Iran] could have at previous meetings triggered threats of like-for-like increases from Saudi Arabia, but not this time around,” he said. “Al-Khalid even promised not to shock the oil markets. This is probably in the knowledge that the new found unity could break as fast as it emerged if the price of oil reverts to lower levels.”
“In the short term, we see both WTI and Brent crude maintain the established trading range between $45 and $50,” he said. “This leaves the risk in the short-term skewed to the downside with stabilizing production in the US and the return of oil from the mentioned supply disruptions risk triggering reductions in speculative bets held by hedge funds and other speculative traders.”

Source: Trend