Doubt over OPEC output deal keeps oil price view in check

Reservations over the ability of the world’s largest oil producers to reach a binding agreement to limit output has prompted analysts to leave their price outlook broadly unchanged, a Reuters poll showed yesterday.

The 35 analysts and economists polled by Reuters forecast Brent crude futures will average $44.78 a barrel in 2016 and $57.08 in 2017, compared to the $44.74 a barrel and $57.28 outlook for the same periods in the previous month’s survey. Brent has averaged $43.93 per barrel so far this year.

The Organization of the Petroleum Exporting Countries, which had agreed to reduce output to a range of 32.5-33.0 million barrels per day in Algiers last month, is expected to work out the details on individual cuts in its formal meeting in November.

However, with Iraq joining Iran, Libya and Nigeria in seeking an exemption from cutting output, analysts are skeptical the various OPEC members can reach a consensus. “New puzzle pieces are being revealed at every turn, puncturing the well-crafted impression of a unified OPEC cartel,” OCBC Bank analyst Barnabas Gan said in a note. Iraq has asked to be excused from OPEC crude output restrictions saying it needs the income to combat Islamic State. Iran, Libya and Nigeria, whose output has been hit by sanctions or conflict, too have sought exemption from the cuts.

“The exclusion of key nations as well as the negative sentiment on the deal from the Iraqis both reinforce the idea that a true shift in the physical market is not likely,” said Jeffrey Quigley, Director, Energy Markets, at Stratas Advisors. While there is a strong possibility of top producer Russia agreeing to freeze output at current peak levels, other non-OPEC producers were unlikely to join the effort and may even end up increasing production, analysts said.

Should the deal fail to materialize, analysts anticipate a sharp sell-off that could drag prices towards $40 a barrel, and for the existing supply glut to last until at least mid-2017. “Currently, our main concerns are the very high level of speculative positions (net long non-commercial positions) and a stronger US dollar, as these could fuel a sell-off in the event of deteriorating fundamentals or disappointments from the OPEC meeting,” said Intesa SanPaolo analyst Daniela Corsini. A possible interest rate hike by the US Federal Reserve, a softening Chinese economy and easing of geo-political concerns in countries such as Libya and Nigeria may further dampen a recovery in oil prices, the poll showed. The poll forecast US light crude will average $43.46 a barrel in 2016 and $55.22 in 2017. WTI has averaged $42.31 so far in 2016.

Oil prices slid yesterday after nonOPEC producers made no specific commitment to join OPEC in limiting oil output levels to prop up prices, suggesting they want the oil producing group to solve its differences first. Officials and experts from OPEC countries and nonOPEC nations including Azerbaijan, Brazil, Kazakhstan, Mexico, Oman and Russia met for consultations in Vienna on Saturday and only agreed to meet again in November before a scheduled regular OPEC meeting on Nov. 30, they said in a statement.

London Brent crude for December delivery was down 38 cents at $49.33 a barrel by 1047 GMT after settling down 76 cents on Friday. US WTI crude for December delivery was trading down 30 cents, or 0.6 percent, at $48.40 a barrel, after closing down $1.02 on Friday. — Reuters