Oil: Doha’s failure runs deep

Norbert Ruecker is head of Commodity Research at Julius Baer.

Oil prices have tumbled after leading oil producers failed to agree on a supply deal at the meeting in Doha over the weekend. There had been a big hype in the run-up to the Doha talks, although most market observers, including us, had warned that there was more room for disappointment than surprise.

The deal’s stumbling blocks were many, including that most petro-nations are starving for cash and that their incentives are set for higher rather than lower production.

Also, freezing instead of curbing production at today’s record levels would have only marginally reined in the supply glut. Market sentiment became overly bullish in recent weeks with hedge funds and other speculators holding large bets on rising prices.

These positions are likely to be unwound over the coming days which should keep oil prices under pressure.

The consequences of the Doha talks run deeper.

Although this was no official meeting of the Organization of the Petroleum Exporting Countries (OPEC), the organisation has seen a blow to its perceived powerfulness over the weekend. Saudi Arabia is doing OPEC no favour with its tough stance against Iran.

While Russia, Saudi Arabia and most others have been producing close to record levels lately, Iran is ramping up exports following the lifting of sanctions earlier this year. Tehran rejected to join an agreement, which would have demanded to freeze its production at today’s below-historical level.

We have long argued that OPEC is a broken cartel that influences prices rather by market psychology than supply action.

Doha also reveals the increasing influence of Saudi’s young deputy crown prince in the country’s oil policy at the expense of the respected oil minister.

Picking OPEC as a battleground for political tensions between Riyadh and Tehran will strain the organisation’s oil policy and weaken its relevance.

Doha aside, the oil market remains oversupplied with a large overhang in stocks. The rebalancing is underway with US shale oil production declining, although much slower than anticipated, and global demand holding up strongly.

Supply outages induced by Kuwait’s oil worker strike and pipeline disruptions in Nigeria and Northern Iraq are fundamentally price supportive and accelerated the clearing of excess supplies.

Beyond the near-term pressure on oil prices, we maintain our neutral view and see no sustained price recovery. Cheap and abundant shale oil supplies are key to our low-for-longer view, where we see prices anchored around $45 to $50 per barrel over the years to come.

The running dry of petrodollars means the Middle East should brace for tough economic and social challenges in the years ahead.

That’s the story line underneath this weekend’s news on the failed Doha talks and Kuwait’s oil worker strike.


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