Wednesday, September 28, 2016

Crude Higher, But Market Faces Long Wait For Next OPEC Move On Output

Uncertainty will remain ahead of Nov. 30 meeting.

By Jenny W. Hsu
Sept 29, 2016

Oil futures nudged higher in early Asia trade Wednesday as market players shifted their focus to November as the time when major oil producers could decide on a more definitive plan to curtail output that has suppressed prices for two years.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in November CLX6, +0.22% traded at $44.75 a barrel, up $0.08 in the Globex electronic session. November Brent crude LCOX6, +0.54% on London’s ICE Futures exchange rose $0.22 to $46.19 a barrel.

Oil prices fell overnight after Saudi Arabia, the largest producer in the Organization of the Petroleum Exporting Countries and the one with the largest spare capacity, said it sees no chance for the cartel to clinch a production cap at a meeting later Wednesday in Algiers.

The comment by the kingdom’s oil minister Khalid al-Falih was hardly a surprise as the market has largely priced in a no-action outcome from the meeting. However, it means more uncertainty until the OPEC’s official meeting on November 30.

“[The Algiers] meeting will not change the fundamental of the market which is still oversupplied. What is changing is the attitude of the producers and that’s what the market cares about the most.” -- Grace Liu, Guotai Junan International.

But at the same time, Falih offered hope that OPEC could deliver a production reduction deal by then, instead of just freezing output. “We need a gentle adjustment to reassure the market,” Falih said at a briefing where he was flanked by his Russian counterpart, Alexander Novak.

According to analysts, with oil prices in the doldrums for over two years, even big producers with strong coffers are starting to feel the pain. Earlier this week, Saudi Arabia slashed bonus payments for state employees and ministers’ salaries by 20%.

“The low oil prices are beginning to backfire on the Saudis,” said Stuart Ive, a client manager at OM Financial.

Iran’s determination to ramp up production until it hits 4.2 million barrels a day is also fueling the internal strife within OPEC. Tehran has repeatedly said it should be exempt from a quota until it recaptures the market shares it enjoyed before sanctions were imposed in 2012. The sanctions were lifted in January this year.

As Iran is aggressively clawing back its old turf, the country could reach its goal by November, analysts said. “By then, the environment may vastly change in favor for an eventual oil deal,” said Barnabas Gan, an OCBC economist based in Singapore.

In July, Saudi Arabia’s production rose to a record high at 10.67 million barrels, spurred by an increase in domestic demand during the summer. Analysts expect that by November, Saudi production could abate as domestic demand for crude wanes in the cooler months.

“[The Algiers] meeting will not change the fundamental of the market which is still oversupplied,” said Grace Liu, the head of research at Guotai Junan International. “What is changing is the attitude of the producers and that’s what the market cares about the most.”

Traders are also awaiting the weekly U.S. inventory data due later today. Analysts surveyed by The Wall Street Journal expect the Energy Information Administration to report that domestic crude stockpiles rose last week.

The American Petroleum Institute, an industry group, said late Tuesday that its own data for the week ended Sep. 23 showed a 752,000-barrel drop in crude supplies, a 3.7-million-barrel decrease in gasoline stocks and a 343,000-barrel decline in distillate inventories, according to a market participant.

Nymex reformulated gasoline blendstock for October RBV6, +1.05% — the benchmark gasoline contract — rose 137 points to $1.4074 a gallon, while October diesel traded at $1.4125, 26 points higher.

ICE gasoil for October changed hands at $413.50 a metric ton, up $3.50 from Tuesday’s settlement.

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