Three points on oil industry dynamics

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Australian Economy, Chinese Economy, European Economy, Macro Economics, UK Economy, US Economy

Oil prices recently witnessed a reversal trend and started upward movement on speculation of Iran joining the party for freezing the output. While Iraq is looking to boost the output to gain market share before the OPEC (Organization of Petroleum Exporting Countries) members meet in Algeria. Oil reversed its trend and started moving upward on August 18, 2016 gaining 20% since dipping below $40 a barrel earlier this month. Crude was seen to ride high on account of the speculation in the market that the OPEC members would meet next month to freeze the output to stabilize the oil market. However, the prices subsequently retreated as Iraq sought to increase its exports and Nigerian militants called an end to hostilities, which would enhance the supply in the market. Saudi Arabia and Iran continue to focus on market. A couple of months back, it was reported that Iran output rose by 300,000 barrels a day to 3.5 million the most since December 2011, while Iraq’s production rose by 160,000 barrels a day to 4.31 million in April 2016. Even Saudi Arabia increased output by 80,000 barrels a day to 10.27 million, the highest since November. This indicates that they are unlikely to agree on OPEC decision to freeze the output. Kuwait’s production slipped 100,000 barrels a day to 2.9 million, the biggest decline in April. Kuwait however plans to boost its oil output to more than 3 million barrels a day within months. The market supply would be the key driver for oil prices going forward while demand seems to be intact. China however is likely to cut the demand in the third quarter as the country is aiming to limit pollution from factories before G-20 summit in early September. Lately, the US inventories probably dropped by 850,000 barrels recently while Gasoline supplies probably shrunk by 1.7 million barrels. Crude and motor-fuel inventories are still at their highest seasonal level in at least two decades. US shale production has been declining for some time, as it needs higher prices to be economical.

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Oil Output (Source: Bloomberg)

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Three latest things worth a note in oil industry

 

The month of September started with very slight steadiness in oil prices at the back of Saudi Arabia’s hinting of OPEC supporting the oil prices. Key things that are being discussed are –

 

OPEC to meet in Algeria: Negotiations between OPEC members and other producers on April 17 at Doha and June 02 at Vienna did not materialize to limit the output as Saudi Arabia and other Gulf nations disagreed to any accord with a condition of all members of the oil-exporter group joining, including Iran. The next international Energy forum will be held in September in Algeria where OPEC will probably revive talks on freezing oil production levels. Even Russia, which is a major oil producer but a non-OPEC is said to join the meet.

 

Iran to join OPEC meeting: The economy is getting a positive tone as Iran is likely to join in OPEC’s meeting in Algeria. Iranian output was said to be raised by 300,000 barrels a day to 3.5 million the most since December 2011. Sanctions were removed upon completion of an arrangement limiting its nuclear program. Iran is the third largest producer of OPEC and had refused to join OPEC’s decision. Iran has now confirmed that it will participate in the upcoming OPEC meeting in Algeria to be held in September and said it would co-operate with OPEC to help the oil market recover but expects others to respect its right to regain its lost share of the market. Oil prices moved sharply as Iran said it will support market to stabilize.

 

Iraq to boost output: Iraq Prime Minister said that the country is not producing as much oil as it should be and therefore to increase the national revenue it is likely to increase the oil and gas production. Iraqi production rose by 160,000 barrels a day to 4.31 million in April 2016.  Oil exports from Iraq’s southern ports have averaged 3.205 million barrels per day in August exceeding the July’s exports of 3.202 barrels per day. This resulted into fall in oil prices. Iraq said it is willing to play an active role with OPEC to support oil prices but it is not ready to sacrifice its goal of expanding market share and will continue to ramp up output. Iraq oil ministry has new plans to develop the oil sector. Ministry also announced its plans to double the crude storage capacity at the country’s southern export terminals to 24 million barrels in the coming years from current capacity of 12 million barrels. Iraq’s production currently stands at around 4.6 – 4.7 million barrels per day.

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Oil prices (Source: Financial Times)

 

In sum, some experts are not expecting much from the International Energy Forum to be held in September with regard to agreement on any freeze or boost to oil market in any significant way as key OPEC members seem to be more concerned about their respective market shares. Supply would continue to overweigh on oil prices. The subsequent OPEC Meeting will be held in November 2016 in Vienna, Austria and is expected to guide the direction to oil price.

On September 01, 2016, brent crude oil fell 2.4% to $45.78 a barrel post the 11% rise in August while US benchmark West Texas Intermediate dropped 2.5% to $43.59 a barrel.

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