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01-26-2016, 09:31 AM
http://business.financialpost.com/news/energy/opec-makes-strongest-plea-yet-for-deal-with-rivals-to-stop-oils-72-free-fall?__lsa=63fd-734d
OPEC makes strongest plea yet for deal with rivals to stop oil’s 72% free fall
Ambrose Evans-Pritchard and Mehreen Khan in London, The Telegraph | January 26, 2016 9:46 AM ET
More from The Telegraph
.
Abdullah al-Badri, OPEC's secretary-general, warns the current glut is setting the stage for a future supply shock, with prices lurching from one extreme to another in a deranged market that is in the interests of nobody but speculators.
Getty ImagesAbdullah al-Badri, OPEC's secretary-general, warns the current glut is setting the stage for a future supply shock, with prices lurching from one extreme to another in a deranged market that is in the interests of nobody but speculators.
The Organization of Petroleum Exporting Countries has issued its strongest plea to date for a pact with Russia and other rival producers to cut crude output and halt the collapse in prices.
Forget the glut, even market insiders are saying oil has entered irrational territory
Oil trading has become detached from fundamentals, experts say, and the best advice for now is to stay out of the way and wait for the smoke to clear. Read on
.
It has also warned that the investment slump is storing up serious trouble for the future.
Abdullah al-Badri, OPEC’s secretary-general, said the cartel is ready to embrace rivals and thrash out a compromise following a 72 per cent crash in prices since mid-2014.
“Tough times requires tough choices,” he told a conference at Chatham House in London. “It is crucial that all major producers sit down and come up with a solution.”
Al-Badri said the world needs an investment blitz of US$10 trillion to replace depleting oil fields and to meet extra demand of 17 million barrels per day by 2040, yet projects are being shelved at an alarming rate.
A study by IHS found that investment for the years from 2015 to 2020 has been slashed by $1.8 trillion, compared to what was planned in 2014.
Tough times requires tough choices
.
Al-Badri warned the current glut is setting the stage for a future supply shock, with prices lurching from one extreme to another in a deranged market that is in the interests of nobody but speculators. “It is vital that the market addresses the stock overhang,” he said.
Leonid Fedun, the vice-president of Russia’s oil group Lukoil, separately said OPEC policy had set off a stampede, comparing it to a “herd of animals rushing to escape a fire. He called on the Kremlin to craft a political deal with the cartel to overcome the glut. “It is better to sell a barrel of oil at US$50 than two barrels at $30,” he told Tass, the Russian news agency.
This is a shift in policy. It has long been argued that Russian companies cannot join forces with OPEC since the Siberian weather makes it hard to switch output on and off, and listed firms are supposedly answerable to shareholders, not the Kremlin.
Mr Fedun said OPEC will be forced to cut output anyway. “This could happen in May or in the summer. After that we will see a rapid recovery,” he said.
He accused the cartel of incompetence. “When OPEC launched the price war, they expected U.S. companies to go under very quickly. They discovered that 50 per cent of the U.S. production was hedged,” he said.
Mr Fedun said these contracts acted as a subsidy worth $150 million a day though 2015. “With this support shale producers were able to avoid collapse,” he said.
The hedges are now expiring fast, and will cover just 11 per cent of output this year. Iraq’s premier, Haider al-Abadi, was overheard in Davos asking U.S. oil experts exactly when the contracts would run out, a sign of how large this issue now looms in the mind of OPEC leaders.
Mr Fedun said 500 U.S. shale companies face a “meat-grinder” over coming months, leaving two or three dozen “professionals.”
Claudio Descalzi, head of Italy’s oil group Eni, said OPEC has stopped playing the role of “regulator” for crude, leaving markets in the grip of financial forces trading “paper barrels” that outnumber actual barrels of oil by a ratio of 80:1.
The paradox of the current slump is that global spare capacity is at wafer-thin levels of two per cent as Saudi Arabia pumps at will, leaving the market acutely vulnerable to any future supply-shock. “In the 1980s it was around 30 per cent. Ten years ago it was eight per cent,” said Mr Descalzi.
Barclays said the capitulation over recent weeks is much like the mood in early 1999, the last time leading analysts said the world was “drowning in oil”. It proved to be the exact bottom of the cycle. Prices jumped 50per cent over the next 20 days, the start of a 12-year bull market.
Norrish said excess output peaked in the last quarter of 2015 at 2.1 million barrels per day (bpd). The over-supply will narrow to 1.2 million bpd in the first quarter as of this year as a string of OPEC and non-OPEC countries reach “pain points”, despite the return of Iranian crude after the lifting of sanctions. By the end of this year there may be a “small deficit.” By then the world will need all of OPEC’s 32 million barrels-per-day supply to meet growing demand, although it will take a long time to whittle down record stocks.
Norrish said the oil market faces powerful headwinds. U.S. shale has emerged as a swing producer and will crank up output “quite quickly” once prices rebound. Global climate accords have changed the rules of the game and electric vehicles are breaking on to the scene.
Barclays said extreme positioning on the derivatives markets has prepared the ground for a short squeeze: “Unhedged short positions held by speculators are huge so there is certainly the potential for a steep move up in prices at some point.”
JP Morgan said the overhang of record short contracts could cause U.S. crude prices to snap back toward US$40 very quickly if sentiment shifts. The mood is already turning: net inflows into “long oil” exchange traded funds have been running at $500 million a week in January.
Saleh Al-Sada, Qatar’s energy minister, said it is still too early to call the bottom of the market. “We will go through one more downturn cycle, but we will recover. Today’s oil price is not sustainable.”
OPEC makes strongest plea yet for deal with rivals to stop oil’s 72% free fall
Ambrose Evans-Pritchard and Mehreen Khan in London, The Telegraph | January 26, 2016 9:46 AM ET
More from The Telegraph
.
Abdullah al-Badri, OPEC's secretary-general, warns the current glut is setting the stage for a future supply shock, with prices lurching from one extreme to another in a deranged market that is in the interests of nobody but speculators.
Getty ImagesAbdullah al-Badri, OPEC's secretary-general, warns the current glut is setting the stage for a future supply shock, with prices lurching from one extreme to another in a deranged market that is in the interests of nobody but speculators.
The Organization of Petroleum Exporting Countries has issued its strongest plea to date for a pact with Russia and other rival producers to cut crude output and halt the collapse in prices.
Forget the glut, even market insiders are saying oil has entered irrational territory
Oil trading has become detached from fundamentals, experts say, and the best advice for now is to stay out of the way and wait for the smoke to clear. Read on
.
It has also warned that the investment slump is storing up serious trouble for the future.
Abdullah al-Badri, OPEC’s secretary-general, said the cartel is ready to embrace rivals and thrash out a compromise following a 72 per cent crash in prices since mid-2014.
“Tough times requires tough choices,” he told a conference at Chatham House in London. “It is crucial that all major producers sit down and come up with a solution.”
Al-Badri said the world needs an investment blitz of US$10 trillion to replace depleting oil fields and to meet extra demand of 17 million barrels per day by 2040, yet projects are being shelved at an alarming rate.
A study by IHS found that investment for the years from 2015 to 2020 has been slashed by $1.8 trillion, compared to what was planned in 2014.
Tough times requires tough choices
.
Al-Badri warned the current glut is setting the stage for a future supply shock, with prices lurching from one extreme to another in a deranged market that is in the interests of nobody but speculators. “It is vital that the market addresses the stock overhang,” he said.
Leonid Fedun, the vice-president of Russia’s oil group Lukoil, separately said OPEC policy had set off a stampede, comparing it to a “herd of animals rushing to escape a fire. He called on the Kremlin to craft a political deal with the cartel to overcome the glut. “It is better to sell a barrel of oil at US$50 than two barrels at $30,” he told Tass, the Russian news agency.
This is a shift in policy. It has long been argued that Russian companies cannot join forces with OPEC since the Siberian weather makes it hard to switch output on and off, and listed firms are supposedly answerable to shareholders, not the Kremlin.
Mr Fedun said OPEC will be forced to cut output anyway. “This could happen in May or in the summer. After that we will see a rapid recovery,” he said.
He accused the cartel of incompetence. “When OPEC launched the price war, they expected U.S. companies to go under very quickly. They discovered that 50 per cent of the U.S. production was hedged,” he said.
Mr Fedun said these contracts acted as a subsidy worth $150 million a day though 2015. “With this support shale producers were able to avoid collapse,” he said.
The hedges are now expiring fast, and will cover just 11 per cent of output this year. Iraq’s premier, Haider al-Abadi, was overheard in Davos asking U.S. oil experts exactly when the contracts would run out, a sign of how large this issue now looms in the mind of OPEC leaders.
Mr Fedun said 500 U.S. shale companies face a “meat-grinder” over coming months, leaving two or three dozen “professionals.”
Claudio Descalzi, head of Italy’s oil group Eni, said OPEC has stopped playing the role of “regulator” for crude, leaving markets in the grip of financial forces trading “paper barrels” that outnumber actual barrels of oil by a ratio of 80:1.
The paradox of the current slump is that global spare capacity is at wafer-thin levels of two per cent as Saudi Arabia pumps at will, leaving the market acutely vulnerable to any future supply-shock. “In the 1980s it was around 30 per cent. Ten years ago it was eight per cent,” said Mr Descalzi.
Barclays said the capitulation over recent weeks is much like the mood in early 1999, the last time leading analysts said the world was “drowning in oil”. It proved to be the exact bottom of the cycle. Prices jumped 50per cent over the next 20 days, the start of a 12-year bull market.
Norrish said excess output peaked in the last quarter of 2015 at 2.1 million barrels per day (bpd). The over-supply will narrow to 1.2 million bpd in the first quarter as of this year as a string of OPEC and non-OPEC countries reach “pain points”, despite the return of Iranian crude after the lifting of sanctions. By the end of this year there may be a “small deficit.” By then the world will need all of OPEC’s 32 million barrels-per-day supply to meet growing demand, although it will take a long time to whittle down record stocks.
Norrish said the oil market faces powerful headwinds. U.S. shale has emerged as a swing producer and will crank up output “quite quickly” once prices rebound. Global climate accords have changed the rules of the game and electric vehicles are breaking on to the scene.
Barclays said extreme positioning on the derivatives markets has prepared the ground for a short squeeze: “Unhedged short positions held by speculators are huge so there is certainly the potential for a steep move up in prices at some point.”
JP Morgan said the overhang of record short contracts could cause U.S. crude prices to snap back toward US$40 very quickly if sentiment shifts. The mood is already turning: net inflows into “long oil” exchange traded funds have been running at $500 million a week in January.
Saleh Al-Sada, Qatar’s energy minister, said it is still too early to call the bottom of the market. “We will go through one more downturn cycle, but we will recover. Today’s oil price is not sustainable.”