Oil Glut: Saudis, Russians Fail to Agree on Cuts

Market Trends - 16/02/2016

Despite widespread speculation percolating through global financial markets, the meeting between Saudi Arabian and Russian energy ministers ended in disappointment with both countries pledging to leave output at levels recorded during January.  While many market participants had been hoping for the early phases of an agreement to cut back output levels to help stabilize prices, no such arrangement was forthcoming.

While no agreement was reached, it does mark the first potential move in an effort to bring supply back to levels that would help supply and demand reach an equilibrium while alleviating the ongoing battle for market share.  Efforts to expand their respective footprints have seen both Russia and Saudi Arabia vie for the other’s key markets, with the former gaining ground in China while the latter widened its market share in Europe.  The truth of the matter is that today’s decision will have almost no bearing on the supply glut that is piling up in onshore inventories across the globe.

Although the agreement reached today was heralded as the first step to a wider accord on production and output, a binding arrangement for the industry remains elusive.  The move to freeze output at record levels represents no shift in policy and fails to hold other industry players accountable for their own production.  Iraq and Iran continue to boost production, keeping the energy market in a perilous state of oversupply as they compete for a larger share of global demand.

While Nigeria and Venezuela are moving increasingly towards the brink of default, the question on most investors’ minds is whether onshore inventories will completely fill storage facilities before the more marginal producers are forced to surrender.  Based on the ongoing production gains in both traditional and unconventional oil plays and no demonstrable downtick in prevailing global output, storage levels are likely to rise to full capacity first, throwing the market into disarray and plunging prices to new depths.  Without a comprehensive agreement including all producers alongside an effective enforcement mechanism, crude oil will see no chance of a sustainable price rebound near-term.


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