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Crude’s cat-and-mouse game

Crude’s cat-and-mouse game

When the Organisation of the Petroleum Exporting Countries (Opec) opted last Thursday to renew its output cuts for another nine months, it was already priced in by the markets. And though prices stabilised later, yet the initial market reaction to the move was negative.

In view of the scenario, some were anticipating the Opec may take a more aggressive stance by deepening the production cuts.

Energy consultancy Wood Mackenzie underlined that keeping existing oil output at current levels for another nine months would result in a 950,000 barrel per day production increase in the United States, undermining its efforts to balance supply and demand.

Michael Cohen, head of energy markets research at Barclays, insisted the market may have been looking for “the icing on the cake” – deeper output cuts or limits on exports.

“When those things weren’t included, then this kind of movement happens,” he told CNBC in an email.

“A nine-month extension is insufficient at shale’s current trajectory. The strategic challenge of shale is still to be addressed,” said Jamie Webster, director for oil at Boston Consulting Group.

Nizam Hamid, ETF Strategist in Europe at wealth manager WisdomTree felt: “With supply side dynamics undergoing a fundamental shift thanks to the impact of US shale, only decisive action from Opec will boost prices from current levels, and so far investors have not been satisfied that Opec is tackling the issue aggressively enough.”

Other factors also got into play. In its first complete budget proposals, the White House announced its intention to sell half of the nation’s emergency oil stockpile. The planned move could raise $500 million in the fiscal year 2018 by draining the Strategic Petroleum Reserve, and as much $16.6 billion in oil sales over the next decade.

The proposal also seeks to boost government revenues by allowing drilling in the Arctic National Wildlife Refuge, ending the practice of sharing oil royalties with states along the Gulf of Mexico and selling off government-owned electricity transmission lines in the West. Like much of the budget, those moves are likely to face opposition on Capitol Hill.

Although the presidential budget proposals typically undergo significant changes in Congress, they do provide insight into White House priorities.

The US Strategic Petroleum Reserve currently holds 687.7 million barrels of oil in salt caverns and tanks at designated locations in Texas and Louisiana. On the other hand, the 19-million-acre Arctic National Wildlife Refuge has been closed to oil exploration since 1980 due to concerns about the impact on the region’s caribou, polar bears, and other animals.

The budgetary proposal released last week thus calls for raising nearly $2bn in revenue over the next decade by selling oil and gas leases in an oil-rich section of the Arctic National Wildlife Refuge (ANWR).

All these helped dip oil market prices.

But the Opec sees a silver lining in the medium to longer term.

Ahead of the closed-door meeting, Energy Minister Khalid Al-Falih told CNBC, “Nine months with the same level of production that our member countries have been producing at, is a very safe and almost certain option to do the trick.”

“There have been suggestions (of deeper cuts), many member countries have indicated flexibility but … that won’t be necessary,” Falih expressed confidence even before the meeting began. With Saudi oil exports set to decline steeply from June, Opec also appeared sending a clear message to the market.

During a post-ministerial news conference on Thursday, Al-Falih insisted he was not concerned by daily market moves and that seven weeks of declines in US crude supplies and drops in floating oil storage are “excellent” news.

Opec has a self-imposed goal of bringing stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion.

“We have seen a substantial drawdown in inventories that will be accelerated,” Falih said. “Then, the fourth quarter will get us to where we want.”

Some others too, seem to second him. “Compounded by seasonal demand growth, the cuts should help accelerate global inventory drawdown over the balance of the year and will likely set a new floor for crude oil prices in the low $50 per barrel range,” Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions said in a statement. A cat-and-mouse game is definitely on.

Published in Dawn, May 28th, 2017

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