With election over, oil market awaits the next surprise

Nov. 21, 2016
Stunning US election results overwhelmed rumors about oil-supply coordination last week, leaving oil prices unsupported by news reports.

Stunning US election results overwhelmed rumors about oil-supply coordination last week, leaving oil prices unsupported by news reports.

Indeed, the physical oil market remains oversupplied. Long-awaited balance keeps getting delayed.

According the International Energy Agency, US Energy Information Administration, and Organization of Petroleum Exporting Countries, the market edged the wrong way in October.

In their monthly projections, all three agencies implied slight month-to-month increases in expectations for annual average balancing values, mainly inventory changes.

Because IEA and OPEC don't project crude production by OPEC members, OGJ calculates balances using year-to-date averages for that crucial variable.

However approximate, the numbers show inventories continue to build, albeit at diminishing rates. The market still has too much oil.

Even worse, among projections for 2017 by IEA, EIA, and OPEC, only IEA's suggests an inventory decline next year.

Production is high at present from the important members of OPEC and Russia, who will be party to any agreement that emerges from Vienna at month's end on supply management.

When OPEC in September disclosed work toward such an agreement, the target range indicated a group production cut of as much as 740,000 b/d. OPEC also requested cooperation from outside its membership-namely, Russia.

More recently, the possibility of a production freeze has entered unofficial conversation. A freeze differs importantly from a cut.

With output already high, the important producers would more readily embrace--and adhere to--a freeze. Most of them can't produce much more than they are now, although Saudi Arabia insists otherwise.

A freeze essentially would enshrine present circumstances, with low-cost suppliers producing at nearly maximum rates and higher-cost competitors slashing output.

That, by the way, is how markets classically work.

Targeting either a freeze or a cut, any agreement would stimulate an oversupplied market obsessed with headlines.

With OPEC's internal politics historically touchy, of course, even a freeze might be too much to expect.

Anything's possible, though. Supposedly learned observers, after all, didn't expect Donald Trump to be elected president.

About the Author

Bob Tippee | Editor

Bob Tippee has been chief editor of Oil & Gas Journal since January 1999 and a member of the Journal staff since October 1977. Before joining the magazine, he worked as a reporter at the Tulsa World and served for four years as an officer in the US Air Force. A native of St. Louis, he holds a degree in journalism from the University of Tulsa.