Panmure’s Colin Smith’s appraisal to the shambolic outcome to the OPEC meeting in Doha.

In a surprise outcome, OPEC and non-OPEC producers failed to reach an accord at a summit meeting in Doha yesterday. The apparent cause of the failure was Saudi Arabia’s refusal to accept a deal without some sort of commitment from Iran. While a freeze deal was always likely to leave questions over what oil price was justified by current supply/demand balances and inventory levels, this outcome demonstrates the deep schism within OPEC and removes hope of potential producer action to curb output. Markets are rebalancing, so although oil is likely to come under pressure, the immediate damage may be limited. However, this outcome suggests that market forces alone are going to set the price for the foreseeable future and that leaves open the likelihood of more volatility and the potential for more downside.

 

Potential deal triggered resurgence. The increase in oil prices since the middle of January coincided with Russia’s willingness to enter a formal dialogue with OPEC, potentially paving the way for an OPEC/non-OPEC deal. Hopes have been high for a deal to freeze output at January or February levels, but excluding Iran, which has consistently made it clear that it would not countenance a freeze while it rebuilt production, following the lifting of nuclear related sanctions. Those hopes were dashed yesterday.

 

Saudi intransigence. Given that this meeting has been three months in the making, it is surprising that it was held at all in the absence of firm commitments to strike a deal and odder still that the position of the most important player, Saudi Arabia, had not been fully firmed up in advance. Iran had always excluded itself from participation in a deal and it was not present at the Doha meeting. The finger pointing suggests that Saudi Arabia could not bring itself to sign a deal without some sort of commitment from Iran and may have been expecting late concessions.

 

Market rebalancing. In any event, the oil market was rebalancing, partly as demand growth has remained reasonably strong and partly because of the impact of the collapse in investment over the last year and a half on non-OPEC supply. On the latest IEA forecast for supply and demand and at current OPEC crude supply, the market will be modestly in deficit in 2H16, for the first time since the end of 2013. However, inventories remain bloated and it would not take much for that apparent under-supply to turn into continued build. That is a recipe for more volatility and potential price downside.

 

Uncharted territory. Since OPEC gave up the role of the swing producer in November 2014, the oil market has been left to find its own level. The failure of the meeting yesterday demonstrates how far away a formal deal to try to reinstate some management over oil prices on the the part of major producers still is, despite the extreme financial pain they are suffering. Rebalancing is coming and we may be passed the low point, but that is not a sure bet.

 

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