Oil producers’ meeting in Sept will be a gamechanger

Oil prices in the international markets have gained more than 18 per cent in August, the best performance since Q1 of 2009. Prices rose after comments from the Saudi and Russian oil minister about possible action to stabilise prices triggered a round of buying.

The IEA also forecast a healthy draw in global oil stocks in the next few months that would ease a glut that has persisted since 2014 on the back of rising OPEC and non-OPEC supply.

The OPEC meeting in Algeria next month will be a game changer. Saudi Energy Minister Khalid al-Falih said OPEC members and non-members would discuss the market situation, including any action that may be required to stabilise prices, during an informal meeting on September 26-28 in Algeria.

Although, there is speculation that Saudi Arabia and the rest of the OPEC nations will agree to a production freeze with Russia and other non-OPEC members, Iran, the third-largest producer in OPEC, had refused to join a previous attempt this year to stabilise production. News of its potential support for a production freeze helped halt an abrupt slump in crude prices.

On the other hand, Iraq’s Prime Minister has also said that the country had not yet reached its full oil market share, suggesting his government would not restrain crude output as part of any possible OPEC agreement to lift prices. Iraq has planned to increase exports of Kirkuk crude by 150,000 bpd from its northern fields.

OECD inventories still remain high. In the US, drillers added 10 oil rigs in the week to August 19, the eighth straight week of rig additions, as crude rebounded toward the $50-a-barrel mark, at which drilling is viable.

The increase in drilling rigs is resulting in an increase in oil production, which is finding its way into storage.

Oil production estimates in the same time frame stood at around 8.5 million barrels per day (mbpd), while US crude oil inventories increased by 2.5 mbpd for the week ending August19.

At 523.6 million barrels, US crude oil inventories are at historically high levels for this time of year. In OECD countries, total commercial stocks fell in June to stand at 3,045 mbpd, which is 311 mbpd above the latest five-year average. Crude and product inventories showed a surplus of 175 million barrels and 136 million barrels, respectively.

The high inventories are resulting in weak refining margins across the globe, which, in turn, is capping the rally in oil prices.

With the end of the driving season in Q3, 2016 in the US, gasoline demand could see a seasonal downward correction, which would pressure oil prices.

The only positive for prices now is the higher growth anticipated for some major oil consuming economies, which is expected to lead to higher oil consumption in coming months, particularly with the onset of winter.

We expect oil prices to correct towards $40 in a month, while the onset of winter from October in the Northern hemisphere makes oil a good investment from a three-month perspective to go higher towards $60 per barrel. (CMP: WTI $47/bbl). MCX oil (CMP: ₹3,160/bbl) can move lower towards ₹2,850 from a month perspective.

The writer is Associate Director — Commodities & Currencies, Equity Research & Advisory, Angel Broking. Views are personal.

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