In Depth

Oil price posts two-year highs - but how long can it last?

Brent rose above $59 a barrel this week, its best third-quarter showing since 2004

Oil price endures dramatic swings amid Opec 'brinkmanship'

30 November

The oil price is undergoing dramatic price movements as traders react to a host of reports about the key Opec meeting in Vienna today.

Brent crude, the international oil price benchmark, dropped four per cent yesterday but was more than five per cent up this morning, hitting around $48.80 a barrel. 

Its US counterpart, West Texas Intermediate, has been on a similar rollercoaster and was almost five per cent up this morning to $47.35 a barrel.

Opec's 14 members, especially major players Saudi Arabia, Iraq and Iran, are involved in "a high-stakes game of brinkmanship" over which countries should bear the brunt of a production cut of around a million barrels a day, says The Times.

That was the outline of a tentative deal agreed in September. If it is finalised, it will encourage hopes that the oil market will return to supply balance and prices should go back above $50 a barrel - the International Energy Agency has even predicted it could quickly reach $60. 

"Failure to clinch a meaningful deal… could trigger a further sharp lurch downwards, possibly into the $30 range," adds the Times.

The Financial Times reports optimism is holding sway at the moment after the oil ministers for Iran and Iraq both indicated they felt a deal would be secured.

But Iran has said it will not cut production and could increase output to pre-international sanctions levels. Iraq is also resisting pressure, while Saudi Arabia has threatened to unleash a new flood of oil if others do not take a share of the reduction.

"A potential compromise would be for Opec to return to some form of production quota, instead of ordering outright cuts," says Reuters

It's unclear what such a watered-down agreement would do for oil prices. There are also concerns that if the deal is agreed in full and prices rise, US producers might increase their own production and trigger a new supply glut.

'Sharp oil price correction' if Opec talks fail

29 November

Analysts are "warning of a sharp [oil] price correction" if Opec fails to secure a deal to cut production tomorrow, says Reuters.

A tentative agreement was announced last month, causing Brent crude, the international oil price benchmark, to rally from around $44 to $54 a barrel. However, prices then gyrated wildly as doubts emerged over whether the deal would be ratified at the cartel's summit in Vienna tomorrow.

After a three per cent fall on Friday and moving in a wide four per cent range yesterday, Brent was down 0.6 per cent to $47.95 this morning.

Brent's US counterpart, West Texas Intermediate, followed a similar path and was equally down 0.6 per cent today to stand at $46.80.

In a note to clients, Goldman Sachs said that if Opec does agree its production cut, taking output to between 32.5 and 33 million barrels a day, then oil should surge into "the low $50s a barrel", says Reuters.

Alternatively, if Opec fails, prices could plummet to below $40, a level "difficult to sustain", said Goldman, and oil would average $45 next year.

Ahead of tomorrow's summit, most of the market chatter has been about discord among the bloc's members, adding to pessimism the deal will not be finalised.

Details of which countries will make what cuts should be presented to ministers at the outset of tomorrow's gathering. However, a meeting on Monday ended "without agreeing on concrete details".

There were also reports this morning that non-Opec producer Russia, one of the world's largest oil exporters, will not attend the Vienna meeting after all, meaning it will not make a corresponding cut in the short term.

Opec was "scrambling to rescue the deal" yesterday, said Reuters, and traders were buoyed by news that Iraq and Iran, the group's number two and three producers, are prepared to at least freeze output.

Hamza Khan, the head of commodities strategy at ING, said: "There's going to be speculation until the meeting that makes prices very difficult to predict between now and Wednesday."

Oil price hit by fears over Opec meeting

28 November

Oil prices fluctuated wildly this morning as traders question whether Opec will agree a cut in production at its summit on Wednesday.

Just after 10.30am UK time, Brent crude was trading at $47.44 a barrel – up 29 cents on its previous closing price – while in the US, West Texas Intermediate (WTI) had risen 15 cents to $46.21 a barrel.

However, both had fallen by as much as two per cent in early trading. On Friday, prices dropped by as much as three per cent, says Reuters.

The volatility is being driven by trader speculation over the Opec summit in Vienna on Wednesday. 

According to The Guardian, the meeting has "long been inked in as the moment when Opec members would finally put their differences aside and agree detailed output cuts".

A serious global oversupply has seen oil prices plummet over the past two years – at as much as 94 million barrels per day, there is too much oil being produced to keep prices rising.

From a 2014 high of $112 per barrel, prices fell to a mere $30 in February this year. There has been a sustained recovery since then, with prices hovering around the $45-$50 per barrel mark.

However, some traders believe nothing concrete will emerge from Wednesday's meeting, while there are also concerns that, even if the producers agree action, it may not be enough.

David Hufton, of brokerage PVM Oil Associates Ltd, said in a note: "Do not take an announcement of a headline cut of one million barrels per day (bpd) at face value. 

"It could still imply an Opec production level considerably in excess of 33 million bpd, depending on developments in Libya and Nigeria and the speed and rigor of compliance." 

According to Reuters, there is also concern that major non-Opec producers, such as Russia, will not resolve their "simmering disagreement" with the cartel over who should cut production and by how much.

Unease was exacerbated yesterday when Saudi Arabia's energy minister, Khalid al-Falih, said he believed the market would balance itself in 2017 even if producers did not agree a cut - and so keeping output at current levels was justified.

Oil price could hit $60 after Opec deal - but 'may not last'

25 November

The oil price could jump to $60 a barrel if Opec finalises a cut to production at its meeting in Vienna next week, says the International Energy Agency.

However, executive director Fatih Birol told Bloomberg that could also trigger further US production and so "put downward pressure on prices again within nine months to a year".

Longer-term, prices may go on to experience a spike as the effect of the unprecedented withdrawal of investment from the sector in recent years feeds into lower production, which could lead to a supply shortfall.

"This is the first time in the history of oil that investments are declining for three years in a row," Birol said. "As a result, we may see bigger difficulties in a few years' time."

Prices have been higher in recent days as traders bet on the increased likelihood of Opec next week securing its proposed production cut of up to one million barrels a day.

That would help bring to an end the long-running supply glut, which has weighed on prices for two years.

Brent crude yesterday edged above $49 a barrel after Russia hinted again at its support for a deal, suggesting it may cut "200,000-300,000 barrels a day" next year, says Reuters.

US counterpart West Texas Intermediate rose to a little above $48 a barrel.

Both benchmarks were down 0.9 and 0.8 per cent respectively this morning to $48.60 and $47.60 a barrel.

Oil price heads toward $50 ahead of Opec meeting

22 November

The oil price came within 40 cents of the important $50 a barrel threshold in Asian trading overnight as optimism grew for a cut in Opec production to be agreed next week.

International benchmark Brent crude touched a high of $49.63 before falling back. However, in London this morning, it was still trading well above $49, more than 12 per cent up on last week's low around $43.50.

Its US counterpart, West Texas Intermediate, was up 0.5 per cent at a little below $48.50 a barrel, a rise of more than 15 per cent from its nadir last Tuesday.

Those lows came amid widespread pessimism over the chances of Opec finalising its deal to cut as many as one million barrels a day from its production, adding to negativity on global supply after weeks of stockpile builds. 

But traders have turned more positive on the chances of the deal succeeding after reports indicated Iran, Nigeria and Libya could be exempted from the cuts without scuppering the wider agreement.

Analysts have speculated that the unexpected optimism caused investors to cover their big bets on falling prices – so-called "shorts" - that have been placed in recent weeks.

"As we get closer to the meeting, the threat that they will achieve some agreement has triggered a lot of short covering," Gene McGillian, the manager of market research at Tradition Energy in the US, told Reuters.

However, there are still some doubts whether the deal, to be discussed at the Opec meeting on 30 November in Vienna, will be concluded.

"You never know with OPEC - sometimes they go to the last minute and there are a lot of false starts," said Phil Flynn, the senior market analyst at Price Futures Group in Chicago.

Goldman Sachs told Reuters that if the deal goes through, the oil market should return to balance by mid-2017. If prices go above $50-$55 a result, though, this could trigger a surge in US output that could upset the balance again.

If the deal fails, the bank said the market would remain in supply surplus throughout next year and the resulting sell-off would send the oil price tumbling, perhaps to below $40.


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