The result: nothing was agreed. It comes as no surprise that oil prices dropped significantly in early trading on Monday based on this but then, true to recent form, bounced back a bit.
In addition to the non-agreement, Russia have thrown further uncertainty into the market by declaring on Tuesday that they are considering raising their oil production to 540 million tonnes of crude a year. This is a small increase from 534 million tonnes they produced last year.
But what does all this uncertainty and toing-and-froing mean? We caught up with the fund managers of the Guinness Global Energy Fund to get their views.
As expected, Iran is the sticking point
“Reasonably, in our view, Iran have maintained the position that they should be allowed to restore their production to pre-sanction levels. As we have pointed out for some time, coherent decision making within OPEC is complicated by the current production picture, and the amount of over/under production versus each country’s implied quota.
“Latest figures for March 2016 are shown below, which imply that Iran are still ‘under-producing’ by nearly 400,000 b/day, despite having raised their production from 2.8m b/day to 3.2m b/day since January:
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Source: IEA; Guinness estimates (March 2016)
Crude oil market just got a bit too optimistic
“In terms of sentiment, this news will clearly be a short-term negative for crude oil prices and energy equities. Brent oil drifted down just under 5% on the news, at $41 per barrel, and down 10% from its recent high of $45 per barrel. Short-term sentiment towards energy equities has also turned negative, with Asian energy stocks down 2-3% as we write this and European energy equities down similar amounts. We would expect to see further liquidation of long oil futures positions that have built in recent weeks (in expectation of a freeze agreement), putting some pressure on price. Brent is still up nearly 50% from its lows earlier in the year and we don’t expect it to retest these lows post the meeting. As we see it, the crude oil market just got a bit too optimistic and got ahead of itself.”
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Past performance is not a reliable indicator of future results
Source: Bloomberg
No change to fundamentals, with or without a Doha agreement
“The outcome of the Doha meeting results in no real change in outlook for us (and there would not have been even with a supply freeze agreement). The major attendees at the meeting were all producing at or close to record high levels at end of January anyway (and Iran and Libya, the two supply ‘wildcards’ for 2016, did not attend the meeting).
“We assume that the countries that met, as a group, will deliver approximately flat production from here anyway so our estimates for market re-balancing don’t really change as a result.”
The ‘fundamental’ re-balancing of the world oil market continues
“The world oil market is already re-balancing, we are confident of higher oil prices during 2016 even in the absence of a Doha agreement. Just in the last few days, we have seen the US oil directed rig count fall again (now down at 329 from a peak of 1,609), further US E&P companies file for bankruptcy protection and oil production workers have commenced a strike in Kuwait as a result of cuts in wages and benefits (Kuwait produced 2.85m barrels per day in March and Bloomberg reports that production has fallen to 1.1m barrels per day as a result of the strike).
“These kinds of events reflect a world oil market that is suffering substantial discomfort at these oil prices.”
Conclusion – re-balancing continues
“Crude oil and energy equities are likely to see further volatility as we progress through Q2 2016. We must not let this volatility mask the fact that the market is re-balancing in the background, and that a Doha agreement was by no means a requirement. The fact that 18 OPEC and non-OPEC members actually met (and got very close to an agreement) tells us that there is limited downside to oil prices from here and gives us confidence that oil prices are likely to end the year higher than where they are now and higher again in 2017, yielding a positive backdrop for energy equities.”
Find out more about the Guinness Global Energy Fund.
The views expressed in this article are those of the Fund Managers at Guinness Global Energy Fund and not those of TD Direct Investing.
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