By EESHA MUNEEB
SPECIAL TO THE NATION
After rallying about 15 per cent in August, momentum in ICE Brent and Nymex WTI (West Texas Intermediate) prices slowed down fleetingly before hitting choppy weather in September, spiking more than 6 per cent when the Opec production-cut deal was announced. Front-month October Brent settled at US$49.06 a barrel on September 30, up from $45.45 on September 1, and Nymex WTI settled at $48.24 a barrel, up from $43.16.
Almost two years after Opec decided to raise exports in its fight for market share, the group of oil producers at long last coalesced behind an output strategy that will see the organisation rein in production to between 32.5 million barrels a day and 33mmbd in a bid to support crude-oil prices. This was announced by Iranian Oil Minister Bijan Zanganeh, who met with Saudi Energy Minister Khalid Al-Falih midweek.
The agreement had been discounted as hype by a majority of market analysts even as recently as a day before the final deal was announced. Saudi Arabia offered a day before the talks an initial production-freeze proposal that would exempt Iran, Nigeria and Libya as special cases. Without Iran’s nod of approval, no deal would be viable.
The idea of a production cut of any kind in today’s oversupplied environment was tantalising to investors. Now, however, the question of relevance arises.
According to Platts estimates, Opec pumped a total of 33.13mmbd in August and aims to curb production under the new agreement within a range of 32.5-33mmbd. Whether this reduction will be enough to support prices that have been languishing in a sub-$50 zone for most of the year is questionable.
However, speculation around the details of this deal is likely to continue to keep a floor under crude-oil prices until the next Opec meet, which is scheduled for November, and when the group has said the discussion around individual member quotas and enforcement will be finalised.
Meanwhile, margins for physical refined oil products have improved across the barrel in recent weeks as fundamentals tighten amid a seasonal uptick in demand.
In fact, oil product crack spreads assessed by Platts out of Singapore rose steadily in September to multi-month highs amid refinery maintenance and ahead of a seasonal uptick in winter demand.
Apart from the volatility in crude-oil prices, rising Indonesian demand for 92 RON (research octane number) petrol and seasonal refinery outages in North Asia amid returning petrochemical demand for naphtha have sent light-end cracks higher this month. Meanwhile margins for residual fuels have rallied on regional maintenance and a possible uptick in hedging by companies ahead of winter.
Vacillating Nigerian production due to repeated militant attacks in the Niger Delta has also played a part in regional supply tightness, with Malaysian and Indonesian crude meeting the demand from Indian and other Asian buyers.
US production shows some signs of slowing down, falling 15,000 barrels a day in the week ended September 23 to 8.497 million barrels, according to US Energy Information Administration estimates. This, along with unexpected but frequent draws on crude-oil stocks and a brief spate of tropical storms in the Gulf of Mexico earlier in the month, also helped buoy oil prices up.
US figures remain at multi-year highs and higher crude-oil prices have brought shale rigs back into business, with the active-drilling-rig count standing at 418 as of September 23, having risen in 13 of the past 14 weeks.
Fundamentally, there is enough crude-oil supply at the moment to absorb any drop in production by Opec members. The meagre cutback in the short term does not make the move insignificant. Rather, after a lengthy experiment with pumping at will, the group is trying to take back control via a strategy of active market management.
EESHA MUNEEB is senior specialist, oil-price assessments, S&P Global Platts.