The recent oil talks and price volatility


Doha talks

Oil prices made a smart recovery during first two weeks of April 2016 ahead of the Doha meeting between the OPEC and Non OPEC countries to reduce the production and curtail supply at the January levels by the major oil producing countries. Accordingly, the iPath S&P GSCI Crude Oil Total Return (NYSEARCA: OIL) generated 6.84% returns during April 1st to April 15th. Even the Crude Oil futures surged from $36.79 on April 1st to $42.17 on April 12th (Source: Bloomberg). On the other hand, the talks failed as the countries could not arrive at a mutual understanding due to Saudi Arabia‘s insistence on Iran’s presence in the talks and Iran taking a stand on not curtailing its production till it doesn’t attain its post sanction market share. OPEC countries and Russia though have plans of entering into a deal but without Iran‘s presence success of such a deal is doubtful. Markets will now track the OPEC meeting in June to reach an agreement on freezing oil output.



World Oil Consumption (Source: Short-Term Energy Outlook, April 2016 – U.S. Energy Information Administration)


Crude oil production

After the OPEC meeting, data over the disrupted supply from Kuwait, Nigeria, and Venezuela, and from the other OPEC countries for a brief period of time, again triggered the oil prices rally. The reduction in production had an impact on the global supplies by nearly 2.5 million bpd. This triggered the market balance for a short duration and led to jump in the oil prices. Among the Non OPEC countries the decline in oil supply from the US has also boosted the oil price rise .The US output has declined by 3.2% yoy to 9.02 million bpd in Q1 after the highest point of 9.6 million bpd achieved in June 2015. Shale output has also reduced for almost a year by 12.7% and is expected to reach the levels of 4.8 million bpd from 5.5 million bpd in March 2015. However, the current increase in the price might act as a motivating factor for the countries to continuously keep producing thereby disrupting the market equilibrium once again due to excess supply.


Positive indicators

Hopes of China recovering from economic slowdown also contributed to the oil price rising. Foreign currency reserves have increased in March, and the Chinese yuan appreciated against the dollar from February to March 31st, 2016. The CSI 300 surged over 9% driven by the better than estimates earnings by the firms coupled with positive data like improving prices of new homes by 3.1% from March last year. Increase in the industrial output from average of 5.4% to 6.8% in March indicated the rise in oil consumption which even supported oil prices rally. Chinese government even undertook few measures and regulations to revive its economy.


Crude oil price forecast for 2016 (Source: Commodity prices outlook for April 2016 by World Bank)


Oil forecast

Despite the dollar falling, the World Bank has raised its 2016 forecast for crude oil prices to an average of more than $41 per barrel from $37 per barrel in its latest Commodity Markets Outlook, as an oversupply in markets is expected to be balanced, while market sentiments would continue to improve. Moreover, as per the World Bank report, most of the commodities are estimated to recover next year driven by the better demand. On the other hand, World Bank also commented that a better governance and macroeconomic policies need to be initiated given the subdued oil price environment.


Oil Price, WTI (Source: Commodity prices outlook for April 2016 by World Bank)


Given the 50-70% plunge in the oil and metals prices between 2011 and early 2016, many resource development projects were either put on hold or were delayed, in a way, affecting the oil and commodity sector at large. Given the recent developments, World Bank now estimates that a modest price recovery is expected in 2017 for most commodities with the increase in demand while crude oil is estimated to surge to $50/bbl with the market attaining some stability. There are few factors that may impact the price forecast going either side and entail non-OPEC supply scenario, Iranian exports, supply provision by OPEC producers, global demand, and so forth.


Sector Movements


As of now, the Oil & Gas sector is moving up at the back of positivity witnessed in the oil price trend. With these developments, we note the surge in oil stocks, for instance, Woodside Petroelum Ltd (ASX: WPL) rose about 1% on April 28, 2016 and 3.04% in the last one month, while Santos Ltd (ASX: STO) jumped 3.52% on April 28, 2016. Oil Search (ASX: OSH) is another company witnessing a 15.36% rise in the last three months (as at April 27, 2016) at the time of the oil price fluctuations trending in. With upcoming scheduled discussions, more clarity is expected to be attained on the fate of the oil sector in the near and long.

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