Oil price: ‘rumours could move market 15 per cent’

*Offshore oil production platform.

*Offshore oil production platform.

*Russia floats idea of supply cuts coordinated across OPEC, pushing prices above $35

29 January 2016, London —
The oil price surged nearly eight per cent to above $35 a barrel yesterday, ending a fourth consecutive session higher and heading for its second consecutive week of gains, as speculation grew over a deal to cut supplies.

Excess output, currently estimated at a minimum of one million barrels a day, has persisted for at least 18 months and dragged prices to 12-year lows of around $27 at the beginning of last week. At anywhere around its current levels, oil is at “irrational” lows, below even the cost of extraction in many areas, but remains in the thrall of sentiment on production.

It is a shift in this sentiment that has driven the ongoing rally. Hints from a Russian oil executive on Wednesday of a rapprochement with Saudi Arabia on cutting exports were apparently confirmed yesterday, as Russian energy minister Alexander Novak said the Opec cartel had floated the idea of a coordinated five per cent reduction to be discussed next month.

“Saudi Arabia remains committed to the balance of the market and is willing to cooperate with others to stabilize the market,” a Gulf Opec official familiar with Saudi thinking told the Wall Street Journal. “All options will be considered and the doors are open.”

The Journal adds that, according to International Energy Agency figures, Russia produced 11.1 million barrels a day of crude oil and liquid fuels in 2015, and Saudi Arabia pumped 10.1 million barrels of crude a day. As such, “a five per cent production cut by just Saudi Arabia and Russia would be sufficient to bring the market close to balance,” analyst Jefferies said in a research note quoted by Reuters.

Very strong doubts remain over whether a deal will be reached, however, as Saudi Arabia also has an eye on output from its supposed Opec partners Iraq and Iran. Confusion over whether the offer to Russia came from Saudi Arabia or other members of the cartel such as Venezuela or Nigeria has tempered oil’s momentum, dragging Brent crude to around $34 a barrel this morning.

Overall, analysts are warning that the heavy reliance on fragile sentiment is introducing a lot of volatility to prices that could catch traders out.

“Right now, we’re entering a phase where rumours are going to move the market 15 per cent,” said Todd Gross, the chief investment officer at QERI LLC. “You have to be really careful.”
*The Week

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