Lower US Supply to Underpin Oil price Despite Talks Failure
LONDON — The failure by oil-rich nations to agree to freeze production weighed on crude prices Monday. But analysts say oil is likely to rise in the longer-term as many companies, particularly in the U.S., scale back output.
The effort to reach a consensus on limiting production
to support prices failed after Iran stayed away from a weekend meeting
of 18 oil-producing nations in Doha, Qatar. Saudi Arabia said it
wouldn't back a deal if regional rival Iran, which is trying to ramp up
output as international sanctions are lifted, wasn't involved. The
price of oil fell as much as 7 percent after the talks ended but then
bounced back. The contract traded in New York was down $1.14, or 2.8
percent, at $39.22 on Monday while the international standard, Brent,
fell $1.04, or 2.4 percent, to $42.28. The cost of oil has fallen
in the past two years from above $100 a barrel to touch 12-year lows
this year, before picking up in recent weeks. The inability of
OPEC countries and Russia to freeze production levels means they will
likely continue to pump oil at near-record rates. However, other
producers — notably U.S. shale companies — are cutting back on
production to cope with the lower prices and some have even gone bust.
That has the potential to support prices. Last week, before the
Doha meeting, the U.S. Energy Department and the Paris-based
International Energy Agency both reported that U.S. production was
declining. The IEA noted signs that "the much-anticipated slide in
production of light, tight, oil in the United States is gathering
pace." It added that by early April the rig count in the U.S. had fallen
nearly 80 percent from the peak seen in October 2014 and that more
anecdotal evidence is emerging of "financial problems taking their toll
on the shale pioneers." Lower potential U.S. supply is one of the
reasons why oil prices have rallied more than 60 percent since their
early year lows — alongside expectations of some sort of deal emerging
at the meeting in Doha. Fadel Gheit, a senior energy analyst at
Oppenheimer & Co., said the recent cutbacks in investments will help
rebalance supply and demand in the longer-run whatever the short-term
disruption caused by the Doha failure. "We believe prices will
rise regardless of what OPEC does or does not do, as U.S. shale oil
production, not Saudi Arabia, will be the new swing producer," Gheit
said. "We believe oil prices will rise to a sustainable level closer to
$60, the new normal, not $100 and not $40 either." The failure of
the talks in Doha prompted a knee-jerk response in the markets that was
tempered perhaps by news of a strike by oil workers in Kuwait to protest
government cutbacks. The market volatility appears driven in part
by speculative investors, "oil tourists" who drive the price up and
down on expectations about things like the Doha meeting, said Kit
Juckes, a strategist at bank Societe Generale. In the longer-run,
he said, oil prices will be supported "as slowly increasing demand
catches up with slowly decreasing supply and stock-building comes to an
end." One likely impact of the Doha talks' failure is that traders
may scale back expectations that a deal will emerge in the future,
starting off with the next scheduled OPEC meeting in June. Rather than
coordinated production cuts by the cartel, the market may see unilateral
actions from individual countries. The cheap oil price has a huge
impact on the economies of crude-producing countries, particularly the
poorer one like Angola, Nigeria and Venezuela. "Unless Saudi
Arabia or Iran has a change of heart, we fail to see how the outcome (at
the June meeting) will be any different, and it may ultimately be
mounting supply disruptions in stressed states, rather than collective
cartel action, that causes an accelerated market rebalancing," said
Helima Croft, global head of commodity strategy at RBC Capital Markets. ___ Elaine Kurtenbach in Tokyo contributed to this report.