By Raul de Frutos
It could be argued that one explanation for the recovery in oil prices since February was hope for a deal among major producers to limit output.
However, a recent meeting of representatives of major producer nations disappointed. Major oil producers supplying nearly half of global output - including members of the Organization of Petroleum Exporting Countries and other producer-nations such as Russia - ended their meeting in Doha, Qatar, over the weekend without reaching an agreement to cap production. This new development now leaves some questions for metal buyers.
Why Did the Talks Fail?
Iran had ruled out limiting its own production. International sanctions against the country were lifted in January and now that the country is able to export, its goal seems to be to regain lost market share rather than to cap production to help out OPEC neighbors and fellow members. Tehran's position is understandable, to an extent, as other regional powers took advantage - even fellow members of OPEC - of Iran's sanctioned status and filled the gap with their own oil before the international community even thought of lifting Iran's sanctions. Once Iran made its intentions clear, Saudi Arabia - the world's second-largest oil producer - walked away from any agreement that didn't include its geopolitical rival Iran.
Does This Mean Oil Prices Are Back Below $30?
Not necessarily. This development is, of course, bearish for oil prices but there is a difference between what's fundamentally bearish and how markets react to it. As you probably know, we are not here to make predictions but to constantly monitor markets.
This news is the kind that could hit market sentiment, especially at a time when oil prices seem ripe for a pullback. However, OPEC actions might not be required to balance oil markets. Some might argue that low prices are already creating the necessary market rebalance. There is no clear answer on whether oil fundamentals are set to improve or not.
The supply/demand equation is complex and many factors could weigh on prices throughout the year. Production in the U.S. is already declining while weaker economic growth in places such as China and Latin America is expected to weigh on global oil consumption. One thing is clear, however, the failure of the Doha talks and the gap between the Iranian and Saudi position has damaged the credibility of OPEC even further.
Oil prices, one year out. Source: @StockCharts.com.
This will be a huge test for global markets. So far, markets reacted as expected, oil prices fell on Monday on the news but not by that much. If oil prices weaken that could mean that the price rally seen in Q1 was only caused by expectations that didn't materialize. However, if oil prices continue to climb despite the bearish news, that would be a bullish development, suggesting that underlying supply/demand fundamentals are indeed improving.
What This Means For Metal Buyers
This new development is something that could bring oil prices down… or it might not. Metal buyers should keep a close eye on the price of oil. If oil prices actually decline, that would probably have a depressing effect on global markets. Stock markets could suffer and sentiment on commodity markets would worsen.
The currencies of oil exporting countries would weaken against the dollar, that would help the U.S. dollar recover, driving metal prices down as well. On the other hand, if oil markets manage to pass this test, that would be bullish.