Oil: OPEC’s ground hog day

As speculation swirls ahead of next month’s informal oil producer meeting, it feels like ground hog day in the oil market.

With prices diving into the lower 40s per barrel, talks about supply cuts from oil cartel’s members, the Organization of the Petroleum Exporting Countries (OPEC), have resurfaced.

We see the chances of any action as exceptionally slim. The talks rather taste like a creative way to prop up prices.

In a world of lower petrodollar cash flows, most oil-dependent countries are aiming at raising supplies. In fact, there are signs that the pendulum has swung back from resource nationalisation to denationalisation as countries open up to foreign investments to support long-term hydrocarbon production growth.

Mexico’s liberalisation efforts, Iran’s new oil contracts and also Saudi Arabia’s ambitious reform plans should be seen in this perspective. Yesterday’s almost 5% gain in oil prices was in part also supported by comments from the International Energy Agency (IEA) seeing the market beginning to rebalance over the coming months.

However, the ample inventories show that the supply glut persists, while the rebound in US drilling activity suggests that the rebalancing will be anything but swift. Bearish momentum and seasonally softening fundamentals as the summer driving season ebbs are near-term headwinds.

We see oil prices rangebound around $45 per barrel for the time being.

Norbert Rücker is head of Commodities Research at Julius Baer

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