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Credible but very much a maybe

Published Friday, January 29th, 2016

Imagine for a moment that political interests and differences are set aside and Russia/OPEC manage to agree to reduce production by 5%. Since they have a combined production of about 43 mbpd the agreement would reduce global oil output by 2.15 mbpd. The current general consensus is that there will be a stock build of about 1 mbpd in 2Q 2016 and a draw of 60,000 bpd in 2H 2016. Taking away the aforementioned 2.15 mbpd 2Q-4Q 2016 would experience a fall of around 1.8 mbpd in global stocks. If such a change in the underlying fundamental picture does not support oil prices then nothing will.

Such a step is indeed bullish as we saw yesterday after the claim by the Russian Energy Minister Alexander Novak that Saudi Arabia had proposed a 5% cut to support oil prices. Or to be more precise the Kingdom apparently proposed a reduction of 5% by each country. The Saudis have always said that they are not against decreasing production IF non-OPEC members would be willing the share the burden. There is nothing new apart from the mention of a percentage figure. Senior Gulf OPEC delegates reportedly confirmed the Saudi idea but according to CNBC there has been no such proposal from Saudi Arabia.

The news, not surprisingly triggered a massive short-covering rally. More telling, perhaps, is that although every major futures contract registered decent daily gains WTI closed $1.50/bbl off the day’s high and Brent nearly $2/bbl below the highest print. This morning, however, renewed buying is pushing prices higher once again.

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Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.