Our Analytics 10 february — 12:28

Oil storm will break out soon: Who'll win? (Our comment)

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BY MAMMAD EFENDIYEV

Already from the middle of last month, oil prices have been stuck in a narrow corridor, there is no pronounced dynamics in the market. Many experts consider this a lull before the next strong movement. At the same time, the direction of this movement remains a mystery to them. Indeed, on the one hand, the bulls have every reason to play for a raise, since in January OPEC has already reduced oil production by 890 thousand barrels per day. True, the oil-exporting countries participating in the OPEC+ agreement consented to reduce production by 1.2 million barrels per day from the level of October 2018, but already today the record (since 2016) level of production reduction is reached.

To this should also be added a significant reduction in production in Iran and, of course, sanctions against the Venezuelan PDVSA, progress in the trade negotiations between the US and China, and other factors that are taken into account by the market. But oil prices do not want to grow further. Apparently global political upheavals and the economic mysteries caused by them balance the oil market nullifying all the efforts of OPEC+. Another option is not excluded, when large players simply decide to pause, or traders fear that the efforts of Russia and Saudi Arabia to maintain oil prices will not be enough. They may even be preparing for a speculation for the fall. This option too cannot be ruled out, although the general situation does not yet constitute such a turn of events.

Perhaps this is the goal pursued by President Donald Trump, who said that the United States became the world leader in terms of oil and natural gas production thanks to a revolution that occurred in the US energy industry. This is stated in the annual State of the Union address. His quote 'We started a revolution in the US energy industry - the United States is now the leading producer of oil and natural gas in the world' today is replicated by many of the world's leading media.

What danger lies in these words is hard to say. Thus, a catalyst for the decline in oil prices could be the strengthening of the dollar, whose index is already showing a tendency to strengthen. And this is against the background of the fact that the Federal Reserve Service (Fed) does not change the discount rate yet, although it promises a change in monetary policy. And already this month, the market will face a record withdrawal of liquidity in the framework of the program for the normalisation of the balance sheet account. And then the US Treasury will place large amounts of debt securities, which will divert funds from risky assets. It turns out that before the next Fed meeting, the markets can still endure shocks and the oil market is no exception.

But the increasing influence of the United States on the oil market as one of the largest players amid the growth in shale production forces the other side to take action. So, Saudi Arabia and its allies in the Persian Gulf are in favour of transforming OPEC and securing an alliance with Russia and other nine oil-producing countries that are not part of the cartel. The fact is that OPEC countries and 10 oil exporters led by Russia have been cooperating since 2016 in the framework of the OPEC+ deal on restricting oil production. Now the Gulf countries propose to conclude a more formal partnership in order to increase their influence on the global oil market, the newspaper notes. It seems that they fear that without formalising the cooperation established on an honest word, great success will be difficult to achieve. And in the form of a united and strong organisation, of course, it is much easier to achieve the task and confront American shale.

But in OPEC, not all countries unequivocally perceive the new initiative of the Saudis. So, Iran and a number of other OPEC members are opposed to a closer partnership, fearing the dominance of Saudi Arabia and Russia, which are the largest oil exporters among OPEC+. However, in any case, the countries are being prepared to discuss the possibility of forming a new union in Vienna in February. And finally, oil exporters plan to agree on this issue in April, when OPEC+ participants will meet. By the way, in April during the ministerial meeting, according to the head of the Ministry of Energy of Russia, Alexander Novak, the countries participating in OPEC+ may consider a declaration on indefinite cooperation.

It is difficult to unequivocally answer the question of whether the new initiatives find approval from other oil exporters. After all, the Saudis had already proposed to create a new organisation of oil exporters with the participation of Russia, but a number of members opposed such an initiative and it is no longer being considered. In addition, it is worth thinking about whether the new organisation that has grown from 15 to 25 members can make flexible and operational decisions. No matter how were they pushed to this by desire to achieve stabilisation of oil prices. After all, as already noted, the new agreement, as before, will not have legal obligations and will not differ much from the existing agreements.

Yes, the parties are preparing for battle, but for this you need to prepare the rear, what they are doing today. Who will win depends on who is better prepared. And while they are preparing, nothing remains for traders but to wait. That formed a lull in the oil market. But it can not last long. Soon a storm will break out, an oil storm. Who will win, time will tell.

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