Crude and oil prices have taken a hit, as it became increasingly unlikely that Organization of the Petroleum Exporting Countries (OPEC) would cut output in support of prices in a crucial meeting held today in Vienna.
Despite expectations of OPEC nations announcing a cut in oil production to arrest the slide in prices, Vandana Hari, Asia News Director of Platts, feels multi-nation body may hold off any such action despite acknowledging an oversupply.
According to her, the balance of power now seems to have shifted from OPEC’s hands. There is no reason for OPEC to cut output when US producers will continue to produce more. Furthermore, OPEC may keep an eye out but as given the current scenario, they may just keep options open while monitoring the price situation.
Although market may have already factored in the bearishness of an off-putting OPEC meet outcome, prices may go further south in the short run, which will eventually stabilise. Only market forces can stabilise the imbalance, she says in an interview to CNBC-TV18.
Saudi Arabia's oil minister too said he expects OPEC members to reach a unified decision, but he would not disclose details on the decision.
Meanwhile, she does not see premium differential going away on Brent and West Texas Intermediate (WTI) prices.
Edited by: Monishi Parekh
Below is the edited transcript of the interview:
Q: Over the last few days, I have heard some debates in a lot of places whether OPEC has now any kind of control over prices at all and whether this meeting would have any kind of significance. What is your call on that first and what is your own call on where crude prices are heading?
A: Questioning OPEC’s relevance right now is a valid point I think because traditionally historically that organisation has been seen as a major balancing force in the global markets. Mopping ups any excess supplies at the same time if there is any unforeseen major outages, trying to produce more and make up for that, they do account for nearly a third of global oil supply. So that is quite a powerful position to work from.
What does seem to have changed quite dramatically this year is that OPEC seems to be acknowledging apart from the fact that this is a major shift in the world markets as well and OPEC acknowledging at the same time that if there is oversupply in the markets which everybody agrees there is, it is not fully within OPEC’s fear of control, it is coming more out of the US tight oil plays. So the balance of power if you will seems to have shifted or at least it seems to have gone a little bit out of OPEC’s hands. So the growing consensus now is that today’s evening meeting in Vienna will produce no substantial cut agreement from the organisation.
Q: If the OPEC possibly pushes its decision for production cuts to the next meeting early next year, what would be the reaction on crude prices especially Brent crude because it has already fallen ahead of the OPEC meet, it is already at four year lows, could it go down further?
A: Before I address your point on what is the outlook for prices, let me just clarify that what the expectations are around OPEC’s meeting this evening as well as going forward in the next few months - the feeling of sentiment within OPEC seems to be that if the oversupply is coming from the US, why should OPEC cut, why should its members suffer because any cut before it produces any substantial increase in prices also means lower revenues for the producers, right. So why should OPEC cut, why should OPEC take this pain in order only to help the US producers who will continue pumping more?
The expectations even going forward, it is quite likely that OPEC will leave the door open and say maybe that we will keep an eye on the markets, we might call an emergency meeting if prices continue into a tailspin but as of now, it seems that given the current market circumstances of the oversupply coming more from the US, the OPEC seems to be not inclined or not ready to do anything about it.
As far as prices are concerned, in the past few days especially, the market seems to have been factoring in quite a lot of this bearishness surrounding the expectation that OPEC will not agree on any substantial cut so as a result we have seen prices continuing to slide quite a bit since this week OPEC ministers started arriving in Vienna, the market was taking its cues and seemed to have concluded ahead of the main meeting that there would be no more cuts.
Right now, our analysts believe that a lot of the bearishness of OPEC not doing anything has already factored into the prices. Sure, if there is indeed a formal decision not to do much but just the organisation reiterates its commitment to 30 million barrel per day ceiling and asks for a better compliance for that ceiling that will amount to maybe taking away about 300,000 barrels per day, which is very small compared to the oversupply and expectations that OPEC should cut at least more than a million barrels per day.
So we could see prices going further south from here. Definitely tonight’s any formal agreement could have a further bearish impact on prices but going forward they should stabilise and as the Saudi Oil Minister himself said basically now it will be left to the market forces to bring the balance back into the supply demand situation.
Q: What explains this premium that still persists for Brent crude over WTI, still about USD 4 or so and should we expect that to narrow down now. It narrowed down quite a bit but USD 3 or USD 4 is still persisting?
A: That premium is not expected to go away anytime soon. It might wax and wane. It is very unlikely that it will go to the widest we have seen in recent years of more than USD 20 per bbl but it is nonetheless expected to remain and one of the main reasons for that is the disconnect between the two while Brent prices are reflective largely of the global supply/demand balance. The NYMEX prices; NYMEX light sweet crude or some times also referred to as WTI prices basically it is a landlocked crude. US aside from some exports of crude to Canada, US does not allow the export of its crude. So the NYMEX prices right now are being determined or influenced by what is the production of US crude and what the consumption.
One of the reasons that there has not been much pressure on NYMEX crude prices despite the excess supply glut in the US is that also the US refiners have stepped up, their margins have been looking good, so they have stepped up their production rates and they have been consuming a lot of this crude. Going forward, NYMEX will continue to reflect those much localised supply demand economics in the US whereas Brent is more reflective of the global balance.
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