Last week Crude Oil has rebounded to $34.40 from the $27.56 lows set in late January on the back of rumors of a 5% cut in oil production to be discussed at an emergency OPEC meeting that was to take place in March or as early as February. The 25% pop is likely to be unsustainable amidst the lack of communication between lead OPEC nations and Russia, Iran’s propensity to ramp up production to make up for prior losses in a now sanction free climate, as the prospect for an emergency OPEC meeting diminish and on the back of weaker than expected Chinese economic data.
Pressures mounted on leading OPEC members as calls from several OPEC member nations for an impromptu emergency meeting to discuss oil production cuts and coordination with the Russian Federation, hit the wires.
Early last week, sources pointed to Venezuelan requests for an “extraordinary” meeting of OPEC members as well as non-OPEC Oil producers. Nigerian OPEC minister Kachikwu reiterated that OPEC must have a meeting and work towards reaching consensus with Russia on oil output. Ecuador’s OPEC oil minister called for a meeting as well, and stated that other OPEC members may want a March emergency meeting as well. Lastly, Qatar sources were active on the news wires, highlighting that an Emergency March meeting is in the works.
OPEC General Secretary El-Bardi delivered comments to the media, He explained that OPEC and non-OPEC oil producers, together, must solve the global oil glut issue. Iraq’s oil minister stated that he would agree to such a meeting, to discuss coordination as well as cuts, though without an upfront agreement on production targets ahead of the meeting felt it would be “pointless”. The Kuwaiti OPEC Governor also explained that an emergency meeting would be difficult to hold if there is no pre-agreement on cuts. OPEC sources explained that it may be challenging to reach any deal on production cuts as Iran looks to regain market share in oil exports at present.
Iran and Libya are currently working to make up for past losses, stemming from sanctions imposed in 2011 and war, respectively. An Iranian oil source pointed out that Iran will likely increase production by approximately 0.5m/bpd, in a move to take advantage of sanctions that were lifted just 2 weeks ago on Jan 16th. Iran stated that, “it won’t consider a cut” until exports have increased by roughly 1.5m/bpd over the current 1.1m/bpd level, much higher than 0.9m/bpd expectation, set before the Dec 4th OPEC meeting.
Russian oil minister Novak, expressed willingness to have an open dialogue and participate in an open meeting with OPEC members. Market participants piled into long trades pushing oil up to $34.40 highs from the $27.56 12 year low set Jan 20th, prices surged 25% to the upside in the two-week period. The USD/CAD currency pair came off massively, as the CAD currency strengthened 6 full handles, to $1.4014 from $1.4689.The CAD popped-up through the commodity link, as per usual, but also on the back of a hawkish BOC rate meeting wherein the bank decided to hold rates steady at 0.50%. Analysts and market participants, alike, were surprised by the outcome of the meeting which had a coin flip’s odds baked into a rate cut. Wednesday’s DOE crude inventory report showed a build of 8400K vs 3800 (Exp) that was faded by traders shortly after the print. Negative oil data was put on the back burner as the rumor mill churned and the bull rally pushed forward.
It will be important to monitor Fed/Bank of Canada rhetoric and economic data going forward as traders weigh the likeliness of future rate actions against crude oil prices as a dominant factor in the value of the USD/CAD currency pair.
The lion’s share of the aforementioned rumors were put to sleep, at least temporarily, last Friday as Suadi Arabia stated that they have no arrangement to reduce output by 5%, though they remain open to negotiations with all oil producing nations. OPEC delegates also explained that there is no current plan in place to meet with Russia either.
Oil pulled back Friday afternoon as traders’ appetite for crude pared back and again in early trade on Monday, after a weak Chinese economic print hit the wires. China Manufacturing PMI ticked back to 49.4 from 49.6 (exp). WTI Crude Tested lows at $32.70 and trades $33.12 at the tail of the Asian session.
The bears may take control of the oil complex in the near term as earlier rumors continue to be unwound, plans for OPEC production cuts dissolve, prospects for an emergency OPEC meeting diminish, and communications between lead OPEC nations and Russia go dark. Goldman Sachs says an OPEC oil production cut announcement is not likely. S&P analysts are calling for $40.00 average price in 2016, down from prior estimates and Citi has also lowered its forecast to $40.00.
There are several important economic releases this week out of the US, with PCE inflation and ISM Manufacturing Monday, ADP and ISM non-Manufacturing on Wednesday, and Employment on Friday. In the absence of a significant risk-on sentiment in the market place on the back of these reports, it may be challenging for crude to maintain its stride.
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