After Doha: Kuwait strike could do more to limit production than freeze agreement

Kuwait oil worker strike removes 1.7 million b/d from global production, equal to surplus production

Oil prices were down Monday morning on news of OPEC’s failure to reach a production freeze agreement Sunday, but analysts say other supply disruptions may prop up prices in the near term.

The talks between 16 nations wrapped up without agreement on a freeze. AP says OPEC members need “more time” before reaching agreement, hopefully at a meeting in June. The Sunday OPEC meeting to discuss an oil production freeze stalled over the Saudi demand that all members, including Iran, be bound by the agreement. Iran has said that it will not limit production until it has regained pre-nuclear sanctions levels.

Max Fawcett, former editor of the Alberta Oil Magazine, says the Doha meeting was unlikely to have a significant impact on oil prices.

“OPEC was never going to cut, and freezing production at January highs isn’t much of a compromise anyway,” he said by email. “The market was trading higher because the fundamentals are starting to come into balance — you have robust demand growth in China and India and falling non-OPEC supplies.

“This was all theatre. Entertaining theatre, to be sure, but nothing that the people trading physical oil ever took all that seriously.”

However, a labor strike that began Sunday has slashed the Persian Gulf nation’sKuwait’s oil output by 60 per cent, about 1.7 million barrels a day and roughly the amount of surplus production.

Analysts say supply disruptions in other countries, such as Nigeria, may also help to prop up oil prices in the near-term.

Investment bank Goldman Sachs told Reuters that “gradually declining non-OPEC production as well as planned maintenance in the face of resilient oil demand in Q1 have recently pointed to improving oil fundamentals.”

Comments from Bloomberg sources:

“If the potential loss of Kuwaiti crude supply is sustained long enough, that is roughly equivalent to current estimates for the global stockpile build in the second quarter,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA. “Of course, there is a big ‘if’ in terms of how long the strike will last.”

“The only thing saving the bacon in the market is the strike in Kuwait, which is taking a considerable amount of oil off the market,” said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. “Once the labor issues are resolved there’s going to be considerable selling pressure.”

Comments from Associated Press sources:

Last week, before the Doha meeting, the Paris-based International Energy Agency said there were signs that the oil market “looks set to move close to balance in the second half of this year” and noted signs that “the much-anticipated slide in production of light, tight, oil in the United States is gathering pace.”

Fadel Gheit, a senior energy analyst at Oppenheimer & Co., said the recent cutbacks in American shale oil investments will help rebalance supply and demand in the longer-run whatever the short-term disruption caused by the Doha failure. “We believe prices will rise regardless what OPEC does or does not do, as U.S. shale oil production, not Saudi Arabia, will be the new swing producer,” Gheit said. “We believe oil prices will rise to a sustainable level closer to $60, the new normal, not $100 and not $40 either.”

“Unless Saudi Arabia or Iran has a change of heart, we fail to see how the outcome (at the June meeting) will be any different, and it may ultimately be mounting supply disruptions in stressed states, rather than collective cartel action, that causes an accelerated market rebalancing,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.

Reuter’s sources

“Saudi Arabia intentionally torpedoed the agreement and was willing to accept its failure. This has severely damaged the credibility of oil producers in general and of OPEC in particular,” Commerzbank said in a note.

“Once again the Saudis have delivered a hammer blow to fellow producers,” said David Hufton, managing director of broker PVM. “It promises to be the final nail in the coffin for those shale producers and their lenders hanging on for a short-term price reprieve.”