Bad Blood, Timing Means No OPEC Emergency Meeting And No Deal On The Table

|
Includes: OIL, USO
by: Gary Bourgeault

Summary

Those hoping for OPEC emergency meeting will be disappointed.

A meeting without the will and an agreement to lower supply would do more harm than good.

There is too much bad blood to suggest competitors could reach a supply agreement.

Oil supply will increase in 2016, not shrink.

In a market desperate for positive catalysts to support the price of oil, one of the remaining events that could make a difference has been confirmed to have no chance of happening in the near term, as Iran's oil minister said there is no support or desire at this time for OPEC members or its competitors to come to an agreement on cutting production, thus closing the door on any hope of their being an OPEC emergency meeting to come to an agreement on that issue.

Several members of OPEC have been pressing for the emergency meeting to take place, with Venezuela being the most publicly vocal about it.

Outside of OPEC there are several factors as well, with Russia showing no interest in agreeing to cuts, and shale producers strengthening and adding more supply to the market if the price of oil finds support.

For these reasons and others, there is no interest at this time in any type of deal being made to lower production and supply. I don't see in happening in 2016, if it happens at all.

There will be a scheduled OPEC meeting in June, but I don't foresee anything changing at that time concerning production cutbacks.

source: topnews.in

Why it would make oil markets worse

Iran's oil minister Bijan Zanganeh said this:

There should be an intention to make a firm decision in such a meeting; otherwise, the meeting will have a negative impacts on world oil markets.

I agree with him. In a market that is highly volatile and driven by strong emotion, any suggestion there is hope of change would push the price of oil up. Since there is no will to make production cuts, once an emergency meeting was over, not only would the price of oil plunge again, but it would be likely to drop below what it was trading at for some time because of what would be perceived as a failure to reach an agreement, when in fact there was never any hope there would be one.

In June we'll probably see something similar happen, although OPEC will likely signal beforehand it is very improbable there will be a cut in supply as a result of the meeting, in order to manage investor expectations.

A lot of bad blood

Something else to consider is there is a lot of bad blood between OPEC members and their non-OPEC members as well. The tension between Iran and Saudi Arabia has been going on for a long time, and Russia is now battling efforts by Saudi Arabia to take European market share from it.

There is also the temporary carnage being dealt to shale oil producers in the U.S., as well as the impact on deep water offshore drillers and the Canadian sands. This isn't the climate conducive to making a deal.

Outside of OPEC, if any companies were to encourage a supply cut deal, it would be big oil firms. But since they're assuredly salivating at the cheap assets they're likely to pick up as shale companies have to divest of them to survive, or sell off to pay down debt. They of course will continue to circle around the leftovers of those going into bankruptcy as well. For that reason, large energy companies don't mind conditions continuing as they are for now, as it will provide them the opportunity to acquire some extraordinary assets, which will make their long-term future outlook even better.

Bad blood and self-interest will keep any agreement to cut supply from happening anytime soon.

Timing and Iran

Another big factor is the timing of the removal of sanctions on Iran, and its goal to quickly ramp up production by 500,000 barrels per day. Further out it has plans to double that, adding about 1 million barrels per day. The only question is how long it'll take it to meet its goals.

If it were to attempt to bring production back to levels before the sanctions, it would increase global oil supply by about 2 million barrels per day.

Under these circumstances, and the proxy wars being fought between Iran and Saudi Arabia, there is zero chance Iran would agree under any conditions to keep its supply subdued.

It has said it has no intention of flooding the market with oil, but that's only public relations talk in my opinion. If it benefits Iran and strengthens its economy and armed forces, it will do what is best for Iran, no matter what it communicates to the media.

Iran has said it costs under $10 per barrel to produce oil, meaning it has a lot of profitability even at these low prices.

Conclusion

With there being no chance of an emergency meeting being called, and no agreement to be made to lower production, the market will continue to be flooded with oil in 2016. The gap between supply and demand should increase, not decrease during the year.

Anyone looking to OPEC to lead the way for supply cuts is believing a fantasy. It's simply not going to happen.

My view is eventually demand will grow to the point current production levels have a chance to rebalance, but that isn't likely to happen for at least a couple of years - if then.

The problem is the global economy is stalling and prior oil consumption estimates are being downwardly revised, with the most important one being China.

Even under the most robust growth in demand, the amount of oil being produced would still overwhelm the market, making rebalancing impossible in the near term. But now that demand is considered to be slowing, it makes the outlook for the price of oil to remain subdued.

Investors should ignore the calls for OPEC emergency meetings and focus on supply and demand. There are many moving parts to the oil equation, and attempting to put them all together is an exercise in futility. Supply and demand is easy to understand and measure, and that is the most accurate way to assess the oil market and its projected price movements.

That said, we're in for a prolonged period of low oil prices.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.