The oil markets, which cling desperately to any hint of good news, seem to be cautious this afternoon regarding new that the Russian and Saudi Arabian oil ministers are set to meet tomorrow in the capital of Qatar. The Venezuelan oil minister is said to be attending, when he doubtlessly hopes that his petro shuttle diplomacy may finally be bearing fruit. Although no word has leaked as of yet, it would be safe to assume that the Qatari oil minister will attend such an important meeting on his home turf.
One reason for a subdued reaction from oil traders on this afternoon’s news may be that an agreement has already been priced in on Friday by the largest one-day spike in oil prices in seven years. Oil futures jumped 12% in New York, but even such a spectacular show wasn’t enough to erase the damage from prices hitting a 12-year low on Thursday. Friday’s price jump was sparked by the oil minister of the United Arab Emirates telling reporters that OPEC was open to cooperation with non-OPEC producers to reign in the record-high global oil glut.
The “hope and change” message from the Persian Gulf gained some energy from some hard facts reported Friday: The Baker Hughes oil rig count fell for the eighth week, to a six-year low of 439 active drilling rigs; and the first closure of an offshore oil field in Norway. While the closure of the Varg oilfield in the North Sea is mostly symbolic (it was only producing 4,800 barrels of oil per day,) it gave hope to beleaguered oil companies that production was beginning to fall. The US Energy Information Agency seemed to confirm that it was indeed happening, noting a drop in US oil production from last week.
Another positive note from last week is the surge in speculative positions in oil futures brought about with oil’s drop to 12-year lows on Thursday.
If Saudi Arabia and Russia are hurting as bad as some estimate, then Venezuela, Azerbaijan, Ecuador, and Nigeria have the economic equivalent of a sucking chest wound. The Venezuelan oil minister has frantically tried to get some sort of a production cut, from someone, in order to save his nation from collapse. But the situation with the major oil producers is akin to a standoff where everyone is pointing a gun at everyone else. The only way to deescalate is for everyone to put their weapons on the ground, but no one trusts the others to lay theirs down.
Saudi Arabia in particular remembers being played the chump the last time there was a global oil glut. They cut production to support prices, but their “friends” in OPEC (notably Venezuela) expanded production to take over the Saudi’s market share. This is one reason the Saudis have turned a deaf ear to Venezuela in the current crisis.
Russia, the main non-OPEC oil producer, is hurting almost as much as the Latin American and African nations are. The Saudis may believe that the reduction in US oil output is proof that their plan to force the shale industry out of business is finally working, and will now be more receptive to production cuts.
Now that meetings seem to actually be happening, two big questions loom: How will everyone know that the others’ aren’t cheating; and can the famously nimble US shale oil producers slip in faster than the others to claim more market share from everyone else?
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