Oil: All eyes on Algiers

All eyes are on the International Energy Forum in Algiers along-side which Middle Eastern oil producers and Russia are discussing potential supply side measures.

In the run-up to the conference, the petro-nations carefully maintained the ‘oil talk’ and prices moved up or down with any statement. Oil tumbled by 4% on Friday on scepticism about a tangible outcome.

The chances of a credible agreement are low. The record-high production levels show that petro-nations are in need of cash flows to plug budget deficits. The common denominator for negotiations is small and any deal would enter rough waters shortly after signature.

Historically, sacrificing oil revenues has been too bitter a pill to swallow for most petro-nations. That said, Iran’s production and exports have largely caught up to pre-sanction levels, meaning that at least one element of discord has been grinded.

The producers should be careful what they wish for. The US shale industry would cheer on any supply agreement, swiftly responding to higher prices by raising activity and output, enjoying the windfalls and ultimately taming prices.

Drilling activity continues to recover across the leading US shale basins with oil prices trading below $50 per barrel. This reveals how competitive parts of the shale industry have become and illustrates how the shale boom has structurally altered the oil market.

The big picture framed by a pressing inventory overhang remains in place. Growing Middle Eastern exports and a reviving US shale industry suggest that the oil market’s much touted rebalancing will be anything but swift.

Supply concerns should prevail in the near term as North American refiners slow crude purchases with the end of the summer driving season and Saudi exports seasonally strengthen in autumn with summer power plant crude burn faltering. We believe the supply glut will last well into 2017 supporting a view of range-bound prices around $45 per barrel.

Norbert Rücker is head of Commodities Research at Julius Baer

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