Is recent oil rally sustainable?

I may sound a little outrageous saying that no one was surprised at the outcome of the latest OPEC meeting. No matter how many times OPEC and non-OPEC ministers meet to reach any accord on production guidelines, the oil glut will continue. Analysts try to create hopes that prove short-lived. Every one of these failures and subsequent price drops offers new opportunities for exploration and production companies around the globe.

I am also convinced that oil price after the bottoming in February. Backtracking of prices that seem to plague nearly every other analyst is the outcome of vested interests. Most of them talk about recent hike in oil price, now up more than 85 percent from those February lows. I believe that temporary outages from Nigeria and Venezuela as well as the Canadian fires and rollover of production in Iraq and rise of price to US$50/barrel is temporary.

In my last blog I have stated categorically that OPEC has become an impotent entity. However, some of my energy sector analysts still insist that, OPEC led by Saudi Arabia still has the potential to drive oil prices. I would once again reiterate that Saudi Arabia alone just can’t set price direction.

Many western analysts tend to term Iran, a game spoiler as it has declared categorically not to be part of any effort to contain its production unless lost market share is attained. These analysts fail to take into account that in total export of OPEC, even if Iran achieves 4.5 million barrel daily output, it will have no power to influence oil prices.

I may go to the extent of saying that oil producers are trying to make Iran an escape goat. Those who have the capacity to set direction of oil price are United States, Russia and certainly Saudi Arabia. The point to be noted that energy analysts often mention number of rigs being closed in the US. However, they also forget to mention that a decline to around 320 rigs from peak of over 1900 rigs has not made the corresponding reduction in US oil production. In fact its stockpiles hover above 500 million barrels. Oil output of Russia and Saudi Arabia also hovers at historic peaks. Therefore, an additional output of couple of million barrels by Iran just can’t make any difference.

I will conclude my reiteration that analysts of funds are trying to create storm in a cup to recover their losses. As many shale producers are inching towards default, they have to create a hype that oil prices are on the rise. Touching of US$147 price was unnatural and the realistic level over the next couple of years will be US$50.

The tail piece is that mega oil companies (seven sisters) have witnessed reduction in profit, but the world at large has benefited from low crude prices. The big economies have also been the biggest beneficiaries but analysts working for the big funds have been trying to mislead the public at large.