Oil futures retreat as OPEC output cut negotiations stall

Saudi Arabia would support a ‘roll-over’ of OPEC’s current production limit, together with a call for stricter compliance with the same, according to remarks made by a Gulf official, on Tuesday, to The Wall Street Journal.

Given that the most up-to-date estimates currently peg the cartel’s production at about 30.25m barrels of oil a day that would translate into an effective reduction of 250,000 barrels per day, to reach the current ceiling of 30m.

However, such a move alone would theoretically not suffice to prop international prices too far above current levels, if even that. Quite the opposite, it is widely thought that they would be likely to fall back again over coming months, even if only for a time. Hence the apparent need to agree on a more substantial reduction, or to sanction further weakness in prices over the very short-term at least.

Internal OPEC forecasts already assume a cut

In fact, some industry experts believe Saudi Arabia has already been silently laying the groundwork for a concerted and gradual reduction in output for some time now, although its efforts may take time to bear fruit. Thus, on 19 November Morgan Stanley pointed out in a research report how internal OPEC forecasts already assume that the cartel's output will decline to 29.5m barrels per day next year and 28.5m in 2016.

One widely used 'rule-of thumb' is that, all else equal, a 1% reduction in the world’s supply of petroleum, which currently stands at about 92.7m barrels of oil per day, can lead to about a 25% swing in the price of oil in either direction.

In the meantime, industrialised countries continue to amass inventories at the currently low prices, with the average so-called ‘import-cover’ set to hit about 59 days’ worth of consumption in the first half of next year, versus average levels of between 53 to 54 days.

That makes OPEC’s job even harder, as limiting the expansion of those stocks is one of the means by which it keeps a tight rein on markets.

On top of that, some producing countries require a price of approximately $100 per barrel in order to balance their national budgets.

The strength in the US dollar may be a bit of a ‘wild card’

Amongst some of the ‘other factors’ which need to be taken into consideration, when analysing the oil market, is the strength of the US dollar. In a note issued on Monday, Kathleen Brooks, Director of Research at Forex.com, noted IMF analysis which suggests that a 1% rise in the dollar yields a 1.13% fall in the price of crude.

As well, it is often ignored that trends in the world’s energy markets tend to play out over very long-term horizons. Indeed, by 2035 crude oil is expected to account for just 27% of the world’s energy consumption each year, as per BP’s Energy Outlook 2035, with natural gas and coal being called on to provide a similar proportion by that date. Hence, in the backdrop there are in reality much wider dynamics at play which span across the entire globe and a multitude of resources and alternatives.

Our answer is a resounding ‘yes’

Regarding the industry’s ability to meet the world’s incessant demand for energy, and reflecting some of the myriad factors which come into play, on 15 January BP Chairman Bill Dudley said “our answer is a resounding ‘yes’. The growth rate for global demand is slower than what we have seen in previous decades, largely as a result of increasing energy efficiency.”

As of 19:06 front month West Texas crude futures were down by 1.91% at $74.35 per barrel on NYMEX.