Recent data made available by OPEC shows that during the first quarter of 2016, the disparity between oil supply and demand increased. While oil demand, compared to the last quarter of 2015, declined by 0.6 million barrels per day (mb/d), oil supply went from 2 to 2.3mb/d. Despite this mismatch, grim projections made at the start of the year of oil prices continuing to slide downward have largely failed to materialize; in fact, since late January oil prices have gone up. One reason for this apparent anomaly is the expectation among investors of a consensus on an oil output freeze emerging when oil producers meet in mid-April.
In March, Qatar’s Minister of Energy and current OPEC President Mohammed Bin Saleh Al-Sada, announced that OPEC and non-OPEC producers will hold a meeting in the Qatari capital on April 17. Revealing that around 15 OPEC and non-OPEC producers, accounting for about 73 percent of global oil output are supportive of the initiative, the oil minister noted that the meeting would be a follow-up to the talks held earlier in Doha between Qatar, Saudi Arabia, Russia and Venezuela. At that meeting the four countries had proposed an accord to freeze oil output at January 2016 levels and called on other producers to do so.
According to a report by analysts at Kuwait-based Asiya Capital Investments Company, there are two major reasons why investors are being too optimistic about a deal among oil producers. First, the agreement may not happen. Saudi Arabia has been increasing market share with the main objective of hurting high-cost oil producers in the US, the main source of the oversupply, and that mission has not been fully accomplished. Although oil output has begun to fall in the US, production is still relatively high.
Also, it remains unclear whether Saudi Arabia would agree to join any deal that exempts regional rival Iran. The country’s Deputy Crown Prince Mohammad Bin Salman has already said that Saudi Arabia will freeze production only if Iran and other major producers do so. “If anyone decides to raise production, then we will not reject any opportunity that knocks on our door,” he warned.
The second reason is that, even if the agreement takes place, its effect will be limited, as the countries involved are already producing near record levels, and those that are not, Libya and Iran, are unlikely to join. Moreover, latest data confirms that Iran is steadily returning to the market, increasing output from 2.9mb/d in January to 3.1mb/d in February.
Iran has already said it plans to boost its production and that it will not halt production until it reaches 4.0mb/d, probably in 2017, which means that this year it will increase from 3.1 to 3.8mb/d. Meanwhile, in the United States, the US shale industry has been more resilient than expected during the decline in oil prices, showing quick responsiveness to oil price movements.
Pointing to further factors guiding their negative sentiment on oil price increases in the near future, the investment company said that OPEC’s expectations of global economy growing by an additional 0.2 percentage points and for oil demand to increase 1.3 percent YoY in 2016 are not realistic.
“We find these forecasts too high. With flat growth in Europe and Japan, and the US, China and most emerging markets decelerating, we project a 0.3 percentage point decline in global growth and a 0.8 percent YoY increase in oil demand. On the supply front, we assume an increase in Iranian output, other OPEC countries’ output to remain around January levels – whether a freeze agreement takes place or not – and non-OPEC output to fall in line with the 0.7 mb/d decline projected by OPEC.”
Asiya Capital concluded its report by saying that market disappointment about the oil output freeze, rapid technological development in the shale industry, stronger than expected Iranian production and weaker than expected global demand could push oil prices further below the fundamental-based price forecast. The combination of fundamentals and market expectations will most likely keep the price of oil below last year’s level, the investment company concluded.