Russia likes stable oil prices. Especially when they are above $50 a barrel. Still over six months away from the original expiry of the Opec production freeze deal, Russia has publicly voiced its backing for another extension of the same. It comes at a time when the compliance is believed to be at an all-time high, and the US production has felt some jitters in the Harvey aftermath.
“Based on preliminary assessment, it is clear that the deal was efficient and contributed to the stabilization of the market,” said Russia’s deputy prime minister. Recall that it was as recent as last month when Russia had asked for better compliance and a deeper cut. Then Harvey happened. Now everyone appears to be talking about the efficacy of the Opec deal, after being heavily critical of the deal, when it had failed to spur prices.
Russia has played an active role since the Opec deal, and has voluntarily contributed reduced output in order to support prices. It has now become increasingly evident that the US oil production especially that from shale, was and remains the biggest factor. Ever since the energy rich Texas has been hit by Harvey, prices have rebounded significantly.
But the joy could well be short-lived, as no matter how huge the loss is, the US rig count has not decreased. A bigger impact has been felt in the midstream and downstream segments, as refineries struggle to retain capacities and gasoline prices have jumped due to supply concerns. All this while, there is little evidence to suggest that the US oil production could extend its decline beyond a month.
Moreover, even if Opec stays true to its word, which it has up until now, there is ample reason to be worried. The likes of Libya, Nigeria and Iraq are fast approaching record high production. Recall that these countries are not part of the Opec production freeze deal. The global stockpile has proved to be stubborn, and has continued to rise week after week. Global demand has not picked up as earlier anticipated either.
Some market players anticipate that North Korean alleged hydrogen bomb test could do to the oil market what Harvey could not. Harvey’s may well be a short-lived impact, but should tensions escalate after North Korea’s nuclear test, it carries a lot more geopolitical risk premium than any other natural disaster. Opec, meanwhile can continue to claim its relevance, but the oil market has surely found more relevant triggers.
Comments
Comments are closed.