The world’s major oil exporting economies have been putting together an agreement to freeze oil production levels, and Russia’s energy minister is optimistic that it will be effective in finally stopping the slide in oil prices that has brought the price of oil down roughly 75% since the summer of 2014.
That’s according to a report in the Wall Street Journal which states that oil exporters have gotten countries which produce 73% of the world’s oil to agree to not increase production from today’s historic highs. According to the report, Russia’s Energy Minister Alexander Novak would be “effective” even without the participation of Iran and Iraq.
The news seemed to buoy the oil market, with Brent crude prices rising to a two-month high. But there’s plenty of reason to doubt that the action will bring any sort of lasting rally to the market. First, global production may still continue to rise, with the lifting of economic sanctions against Iran allowing oil producers there too soon access the market. In addition, this agreement is still tentative, and only requires participants to keep production at current levels, which are at all-time highs in the cases of Russia and the United Arab Emirates.
And finally, there remain huge stockpiles of unused oil in the market today. “We may get to the end of the year, and even though supply and demand are in balance, the market shrugs and says ‘So what?’ because it’s waiting for proof of inventory draw-downs,” Mike Wittner, head of oil markets at Societe Generale told Bloomberg. “Moving from stock-builds to balance might not be enough.”
Indeed, the International Energy Agency estimates that inventories that have been built up over the past couple years won’t be cleared until 2021. And that means we could see many more years of below-average oil prices, no matter what the Russians say.
The news seemed to buoy the oil market, with Brent crude prices rising to a two-month high. But there’s plenty of reason to doubt that the action will bring any sort of lasting rally to the market. First, global production may still continue to rise, with the lifting of economic sanctions against Iran allowing oil producers there too soon access the market. In addition, this agreement is still tentative, and only requires participants to keep production at current levels, which are at all-time highs in the cases of Russia and the United Arab Emirates.
And finally, there remain huge stockpiles of unused oil in the market today. “We may get to the end of the year, and even though supply and demand are in balance, the market shrugs and says ‘So what?’ because it’s waiting for proof of inventory draw-downs,” Mike Wittner, head of oil markets at Societe Generale told Bloomberg. “Moving from stock-builds to balance might not be enough.”
Indeed, the International Energy Agency estimates that inventories that have been built up over the past couple years won’t be cleared until 2021. And that means we could see many more years of below-average oil prices, no matter what the Russians say.
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