Rigged and ready: After recent gains, are oil prices set to recover?

 
Katherine Denham
Oil Rigs In The Cromarty Firth Awaiting Decommission
The oversupply of oil has driven down prices (Source: Getty)

The oil market has had a tough time this year, with prices sliding since October.


And yet, there’s been a radical turn of events over recent days, with the picture looking drastically different as the markets opened for trading this week.

In fact, one of yesterday’s biggest market movements was oil, with brent crude surging by more than five per cent during the morning’s trade, rising back above $60 a barrel, while the West Texas Intermediate shifted up to $53 a barrel.

So let’s look at the reasons why, and whether this recovery in oil prices looks set to stay.

Trade truce

The tension between the US and China has thawed somewhat now that Donald Trump and Xi Jinping have declared a 90-day trade agreement. It might only be temporary, but the deal certainly pumped some positivity into markets, with oil really revelling in the glory.


Of course, the prospect of the world’s largest economies imposing more trade tariffs had dampened prospects for oil going into next year. As Jameel Ahmad, head of currency strategy at FXTM, points out: “In recent weeks, oil has suffered severely from global economic health concerns stemming from trade tensions.”

But this latest deal – which sees the two nations promise not to impose extra tariffs for the next three months – has calmed concerns, and figures show that the oil market is pleased about the ceasefire.

“Further progress towards the easing of trade tensions, coupled with a more downbeat tone from the Federal Reserve regarding interest rate expectations, is presenting an opportunity for traders to take profit from USD buying positions,” says Ahmad. “If there is further progression with this issue, it would be seen as a potential buy for the oil markets.”

Russia taking the reins

But that wasn’t the end of the weekend’s agreements, because the G20 summit also saw Vladimir Putin announce that Russia would extend its pact with Saudi Arabia to manage oil output next year – a move which paves the way for a potential cut to oil production.

The oversupply of oil – which has driven down prices – remains a glaring problem. Cuts seem inevitable, but plenty of questions still hang in the air. “We remain concerned that any cuts may well be insufficient to curb oversupply in the near term, and that prices will struggle to recover,” says Ashley Kelty, oil and gas research analyst at Cantor Fitzgerald Europe.

And while the continued cooperation between Russia and Saudi Arabia is good news, the lack of both a timeframe and details about the scale of cuts throws a lot of uncertainty into the mix.

As Neil Wilson, chief market analyst for Markets.com, says: “All eyes are on whether Saudi Arabia and Russia commit to enough production cuts to rebalance the market.”

Wide Gulf

While there are reasons to be optimistic, prospects don’t look so rosy for the Organisation of the Petroleum Exporting Countries (Opec), after Qatar announced its plan to quit the oil cartel in January next year, choosing to focus on gas production instead.

We’d suspect that many of the members are wary of how much influence the US has over Saudi Arabia, and whether this leads to decisions that are not necessarily in the best interests of Ope

This decision came as a surprise to the markets, particularly bearing in mind that it’s just a matter of days before the Opec nations meet on 6 December to decide on a policy for production output.

And yet, while Qatar has been an Opec member for almost 60 years, it’s a tiny oil producer – accounting for less than two per cent of the world’s output.

“The news of Qatar pulling out of Opec in January 2019 will be seen as a negative headline for the cartel, but I am not convinced this will have high impact on the oil market,” says Ahmad from FXTM.

“Qatar has already stated that this decision is not linked to the political conflict that led to Qatar being blocked by many of its regional peers in June 2017, but because it prefers to focus on the gas industry.”

However, some analysts disagree, saying that the decision could suggest conflict inside the organisation.

Indeed, it is thought that Qatar’s exit could reflect the growing dissatisfaction among Opec nations around the Saudi leadership. “We’d suspect that many of the members are wary of how much influence the US has over Saudi Arabia, and whether this leads to decisions that are not necessarily in the best interests of Opec,” says Kelty.

He reckons the Saudis are going to have to work harder to maintain agreement between the group over production cuts.

Another point to bear in mind is that Opec has lost some influence on the oil industry over the past couple of years, and Ahmed points out that it’s increasingly trying to cooperate with outside producers instead.

So overall, it is thought that Qatar leaving the producer group won’t have too much of an impact in the short term (particularly as its oil production is so small), but whether this signals a deep-seated problem within Opec is yet to be seen.

Fuel to the fire

So, could this be the start of a correction in oil prices? Really, a lot rests on the extent that oil production is reined in, which should become apparent later this week.

Given the huge oil surplus, only a substantial cut will change oil price’s trajectory over coming months.

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