Oil game 2.0: Market giants upgrade playing strategy

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Getty Images

The bull market for oil, which began in mid-January 2016, has logically finished. Russia, Saudi Arabia, Qatar and Venezuela have agreed to freeze the oil production, but with a stipulation that other oil producers will also take the same action.

The main thing in the entire story is that two largest oil producers in the world, namely, Saudi Arabia and Russia came to a common conclusion. They decided that it is time to stop the fight for the market, time to stop the oil dumping, to stop it at the level of 21.2 mbd. In total, Riyadh and Moscow extracted this volume in January-2016.

One can expect a significant increase in oil prices not earlier than in the second half of the year, although much will still depend on the countries’ compliance with the quotas which they have agreed upon. An example of cooperation within OPEC historically shows that the OPEC members have always tried to go beyond the set quotas, which resulted in significant drop in the oil market since the autumn of 2014.

Since then, the fight for the oil market has greatly intensified. The oil giants began glutting the market, by breaking every thinkable economic models. This resulted in $30 per Brent oil barrel, on average, in January 2016, which is less than in January 2015, when the price had already been at a low level – $47 per barrel.

The world oil demand has always exceeded the supply by an average of four percent at least during the period of ten years (from 2004 till 2014). The largest gap between the volume of demand and supply was observed in 2011-2013 (4.3-5.94 percent), as a result of which the oil prices remained at a very high level ($108-111 per barrel). However, the supply exceeded the demand by two percent, as a result of which, the average price for Brent oil dropped to $52 per barrel as of 2015.

The competitiveness for oil market between Riyadh and Moscow was going on from the times of the USSR. On average, the annual oil production in Saudi Arabia was half as much as that in the Soviet Russia. The situation drastically changed after the collapse of the USSR in 1991.

A year after, the oil production in Russian Federation was 12 percent less than Saudi Arabia and this figure continued to drop till 2001. Russia began to increase its oil production systematically, and brought its volume closer to that of Soviet period in 2009. Currently, the volume of oil production by the two countries is almost equal – 10-11 million barrels per day each.

Obviously, Iran, the proven oil reserves of which amount to almost 158 billion barrels, also played an important role in today’s agreement. Tehran, which had economic sanctions lifted, has already announced its readiness to use its entire fleet of tankers for global transportation of oil, and Goldman Sachs forecasts an increase in oil production in Iran in 2016 to 3.13 million barrels per day (versus 2.85 million barrels in 2015), which, of course, will continue to bear the market.

The following table presents data on the global supply and demand for oil with the price dynamics:

Years Oil production in mln. Bpd. Oil demand in mln. Bpd. Brent ($/barrel.) WTI ($/barrel.)
2004 80.94 83.11 38.26 41.51
2005 81.96 84.41 54.57 56.64
2006 82.22 85.33 65.16 66.05
2007 82.22 86.74 72.44 72.34
2008 82.85 86.11 96.94 99.67
2009 81.15 85.06 61.74 61.95
2010 83.19 87.86 79.61 79.48
2011 83.98 88.97 111.26 94.88
2012 86.15 89.84 111.63 94.05
2013 86.58 91.24 108.56 97.98
2014 88.67 92.08 98.97 93.17
2015 95.71 93.77 52.32 48.66
2016* 95.93 95.19
2017* 96.69 96.61
Data: EIA. *Forecast

As of Feb. 16 morning, April Brent futures is around $34-$35 per barrel. The OPEC basket also grows – it amounted to $28.44 per barrel on Feb. 15, or $1.7 more than on Feb. 12.

Oil traders on the Caspian Sea, with which the author of the article was able to talk Feb. 16, believe that the current agreement between Russia, Saudi Arabia, Qatar and Venezuela are not enough for a stable growth of prices for physical oil supplies.

Some of them believe that the countries will follow contractual quotas, whatever they may be, only on early stages. “After oil prices significantly grow, all of them will rush back to produce a lot of oil, as it was before,” said one of the traders.

Article written by HEI contributor Vagif Sharifov, Editor in Chief, Trend News Agency.

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