Scott Barlow
Vague notions of oil production cuts out of Riyadh and Moscow do little to change the outlook for investors in energy stocks – we're still waiting for global demand to catch up to burgeoning supply. The good news for investors is that they likely won't have to wait long.
An unscheduled meeting among major oil producing nations in Doha, Qatar generated impressive headlines like the Wall Street Journal's "Saudi Arabia, Russia, Qatar, Venezuela Agree to Freeze Oil Output at January's Levels" that suggested an imminent end to the global oil glut. A look into the details, however, suggests only notional ideas of a supply response large enough to support the commodity prices.
Reuters quotes Saudi Oil Minister Ali al-Naimi saying that "he hoped other producers would adopt the plan" to freeze production at current levels which hardly sounds like a binding commitment from an OPEC cartel that has struggled for cohesion.
Officials from Iran, a country that's ramping up production after global trade sanctions were lifted, signalled they would be happy to slow exports but only after they climbed to pre-sanction levels. Iraq has also refused to sign on with the deal.
Investors look to OPEC to support global oil prices but the Americans, not represented in Doha, are the primary cause of the current supply glut. U.S crude production almost doubled from 2006 - climbing from 5.0 million barrels per day to a peak of 9.7 million barrels per day in April of 2015. During the same period, Saudi Arabian production rose a mere 6.2 per cent.
U.S oil production has yet to decline significantly, despite the widely-held belief that the previous lack of OPEC production cuts was designed to bankrupt U.S. shale producers. At the current 9.3 million barrel per day, U.S. oil production has barely budged from peak levels despite the collapse in the commodity price.
The Doha meeting is definitely not a negative for oil patch investors and could be very positive as a precursor to co-ordinated supply responses that actual would provide strong market support.
In general, however, we are still left waiting for mid-2017 when the Energy Information Agency expects global supply and demand to balance out so that excess crude supply can begin to burn off.
The chart below shows the ongoing mismatch between supply and demand where oil production is outstripping global consumption. The drop in global demand relative to supply intensified beginning in the third quarter of 2014, coinciding with the onset of the deep slide in crude prices.
The EIA forecasts suggests that global energy demand will accelerate through 2016 from the current 93.9 million barrels per day to 97.3 million barrels by the third quarter of 2017. Importantly, this will balance global supply and demand – total worldwide production will be the same as demand in late 2017. The glut, if the forecasts are correct, will be over.
Asset prices won't, of course, wait for official notice of a balanced market to become bullish. The commodity price and the stock prices for producers will climb as the lines on the chart begin to narrow. More positively, the virtual disappearance in capital investment in oil production that has occurred in the past 18 months will make it difficult for supply to keep up with demand from late 2017 forward. Global oil markets could rapidly switch from glut to scarcity. So, if the Doha agreements have done little to help energy investors in the short term, the seeds of a sharp rally in the sector have been sown.
Scott Barlow