Oil prices fluctated cautiously on Monday after Goldman Sachs, one of the most influential banks in commodity markets, warned that a key meeting of producer nations could fail to tighten a heavily oversupplied market.
The so-called Doha Meeting in Qatar next week will bring together the majority of the largest Opec and non-Opec members to try to “freeze” output in a bid to hasten the end of a near two-year-old glut.
Brent, the international oil marker, gained 8.5 per cent last week to above $40 a barrel partly on expectations that the first concerted effort by producer nations to end the glut would be a success. It has rallied since hitting a 13-year low near $27 a barrel in January.
But doubts still remain whether simply holding output steady will be enough, with most countries already having raised output close to capacity and Opec member Iran insisting it will continue to raise production as it returns from sanctions — despite opposition from Saudi Arabia, its regional rival.
“A production freeze at recent production levels would not accelerate the rebalancing of the oil market,” said Goldman analyst Jeffrey Currie, adding Russian and Opec output, excluding Iran, was already close to their average forecast level for 2016 of 40.5m barrels a day.
“While a lot of discussions and preparations have occurred since the freeze was first proposed in mid-February, there remains high risk that the meeting fails to deliver any concrete agreement, in our view … the biggest hurdle to reaching any meaningful agreement will be the conflicting Saudi and Iranian stances.”
Igor Sechin, the head of Russia’s state-backed oil producer Rosneft, is due to speak at the Financial Times Commodities Global Summit on Tuesday and his words will be closely watched for any signs of Russia’s intentions, with the country’s output running at a post-Soviet record.
The US crude oil benchmark, West Texas Intermediate, gained 8 per cent last week to near $40 a barrel, but data released on Friday showed hedge funds had lowered their bets on a further increase in prices.
There are signs the physical market is strengthening, however, ahead of the meeting, suggesting that low prices may prove more effective at balancing the market than any artificial production restraint.
The price discount for barrels for immediate delivery narrowed sharply over the past week, which is generally taken to be a sign of tightening supplies and ample available storage for barrels.
Global demand is also seen rising strongly for a second consecutive year as lower prices encourage higher consumption, with Chinese vehicle sales rising 8 per cent in March on the same time last year.
US oil output has started to decline as shale producers have cut drilling rigs, laid off staff and redeployed capital towards paying off debts accrued during the four-year period when oil averaged closer to $100 a barrel at the start of this decade.
David Hufton, at oil brokerage PVM in London, said that the output meeting in Doha had the potential to provide support to prices, but failure to provide a concrete result could once again spook traders.
“Perhaps the meeting will create the $40-a-barrel floor price that producers are hoping for and lay the foundations for a move to $50 a barrel in the second half of the year as US production continues to tick downwards,” Mr Hufton said.
“On the other hand it could also be a complete flop or unconvincing, leaving more questions unanswered than answered. The signs are not particularly promising but the participants need a deal and are well aware of what is at stake and the consequences of failure.”
After losing ground in earlier trading, Brent was up 0.6 per cent at $42.19 a barrel, while WTI rose 0.7 per cent to $40 a barrel.
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