It appears as if recently Russia and Saudi Arabia have been taking lessons from Janet Yellen’s school of `Jaw Boning and Market Manipulation’. Clearly, as a part of the practical component of their course, yesterday’s announcement of an oil production freeze was masterful in its application of double speak. However, I am only able to provide a barely passing grade, as it appears that the market has recognised it for what it was…a sucker's bet.
The Doha meeting of Russia, Saudi Arabia, Qatar, and Venezuela was always going to produce something of interest for the market. However, the possibility of substantial production cuts was always likely to be a significant outside chance without the participation of Iran and Iraq in the deliberations. Subsequently, it comes as no surprise that the only `decisive’ action to be agreed upon is to freeze Saudi/Russian crude production at January’s levels.
The reality is that the meeting was always going to be largely symbolic and any decisions were likely to be absent any enforceability or teeth. The proffered decision for production freezes is likely to make little in the way of a difference to the growing global supply glut. In fact, worse than that, it’s potentially misleading in that both Russian and Saudi Arabian production have both been relatively static throughout much of 2015.
Thankfully, the market saw this distraction tactic for what it was and crude oil prices only temporarily rose on the headline before being sold back towards $29.39 a barrel. It’s clear that the coming weeks are likely to see crude prices ranging between $28.50 and $30.00 despite the pending manipulations that are likely to emanate from OPEC members. In the medium term, market forces will need to clear the excess supply, and this can only be completed through lower prices, especially given the diminishing global growth outlook for 2016.
In addition, it is clear that OPEC has a problem on their hands as Iran seeks to maximise their production output in light of their return to crude oil markets. Also, given the dwindling foreign currency reserves that many OPEC nations are suffering from, gaining any consensus on quotas is rapidly becoming impossible. I’m not sure how many times I need to repeat the adage that market forces will determine the price in the new world order of oil (maybe OPEC doesn’t read me).
Subsequently, lower oil prices are largely here to stay, and my downside forecast, around the low $20.00s, remains in place, especially given slipping global demand. So disregard the `sucker's bet' and play the ranges as you await a lower equilibrium price.
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