By David Haggith, the Great Recession Blog.
Dohaha, Slippery Oil Laughs at Nearly Everyone — Myself Included
As predicted relentlessly here, the scuttled meeting in Doha to limit oil production broke up with no agreement at all. The meeting foundered like a tanker snagged in the dessert sands because of the singular obvious factor that should have sunken all hope weeks ago but did not: Saudi Arabia said, “No deal without Iran.”
Doha disaster predictable yet not the disaster that was predicted
That Doha would hit the rocks was predictable because 1) The Saudis repeatedly stated in advance of the meeting there would be no deal without Iran; 2) There was no rational justification for the widespread belief that the Saudis were bluffing, given their desire to restore their own lost market share and their desire not to create a window for Iran to build its share back up while everyone puts their transmissions in neutral in order to wait for Iran to catch up with the fleet.
Iran has propelled itself forward toward 4 million barrels a day more quickly than a number of prognosticators thought was possible. Two months ago a number of analysts were saying it would take Iran a year to get production up to 3 million barrels per day. Iran passed that mark in just a couple of months. Their progress to date already offsets all of the slack that would have been created in the market by the ongoing decline in US oil production.
It’s absurd the people did not see with certainty that the meeting would founder. They simply didn’t want to believe Saudi Arabia would stay on the course that it repeatedly stated it would take. They didn’t believe the Saudis were ready to crash the market if that is what it takes to retain their market share and keep Iran in a weakened position. That shows the market is operating in a realm of make-believe and denial. Even after the meeting crashed, the market continues acting as if nothing happened.
Iran seems to think that Saudi Arabia is more interested in placing obstacles in its return to the global energy market than an actual rise in oil prices.
Of course, it is. That is what I’ve been saying all along, and it boggles my mind that so many experts don’t see that just because they don’t want to. If the price of oil were the Saudis’ big concern, they wouldn’t have started down this path of refusing to curb their own production in the first place. They would have done what was necessary to support the price of oil right off … just as they have always done until recently.
Why would anyone dream the Saudis went through all this pain just for some short-term reason of throwing a little chaos into the world? Until they reach their objective — be it to recapture market share or to quash Iran — why would they change course? They knew the price would go down when they started down this path. That’s why you have talks at OPEC in the first place — so everyone else can talk the Saudis into limiting or reducing production in order to support the price of oil.
This time, the Saudis said, “No. We will ONLY limit our production after EVERYONE else limits theirs. We’re no longer going to be the ones who cut back only to see everyone else take on more market share when we do cut back. Those days are over.” And, OF COURSE, they want to hurt Iran as much as possible at the same time. They hate Iran!
So, how could the majority of the oil buyers not have seen this coming? It’s obvious they didn’t see the Doha shipwreck coming, given that they bid up the price of oil day after day in anticipation that the meeting would limit production.
Now the situation is different to where almost no one expects any positive change in positions before the next meeting:
The differences between Opec … members that led to Sunday’s failure in Doha to reach an agreement on oil production will likely persist until the next meeting in June, analysts said…. “I would expect next Opec meeting in June is going to be very divisive and very unsuccessful,” said Edward Bell, a commodity analyst at Emirates NBD, speaking about the upcoming Vienna meet. (Gulf News Energy)
Thats the majority opinion of the many articles I’ve been reading … and oil prices are still going up anyway.
Outcome of Doha was the world’s biggest ho-hum
What I didn’t anticipate about Doha’s failure and what nobody anticipated (that I saw) was that a total failure of the Doha meeting would end with oil prices going up the next day. Many major investment firms had predicted that a failure at Doha would cause a crash in oil prices right away. Even those who were convinced Doha would limit production, believed that the meeting’s failure, if it happened, would be devastating to oil prices:
Since the Doha summit was put on the calendar several weeks ago, a production freeze looked all but certain…. That was particularly true since the objectives for the Doha meeting were not all that ambitious – a freeze at record levels of production for nearly all parties involved was never going to have a major impact on the global oil supply imbalance. (Oilprice.com)
It is hard to overstate how surprising the outcome was to the world of energy analysts and market watchers. WTI and Brent prices are set to plunge on Monday, reflecting the failure of OPEC to reach a deal, as oil traders had largely baked in the production freeze deal into the price for crude…. “This is an extremely bearish scenario.” Abhishek Deshpande, an oil analyst at Natixis, told The Wall Street Journal. “Prices could touch $30 a barrel within days….” Russia’s energy minister Alexander Novak expects the oil market will take an additional six months to find a balance because of the collapse of Doha. (Oilprice.com)
Iraq, to be sure, was quite displeased: “We are very, very disappointed,” said Iraq’s representative. “This will effect the price and our earnings. We wanted a deal….” If there is no agreement, then expect a sharp oil market sell-off on Monday. (Zero Hedge)
Negotiations between 16 oil producers in Doha ended without any agreement on limiting supplies, a diplomatic failure that threatens to renew the rout in prices. (Bloomberg)
The deal’s demise will probably do little to alter supply-demand fundamentals as producers committed to a freeze including Russia and Iraq were already producing at record levels. But it’s left a coordinated response to the slump [in oil prices] in ruins, and that will send an important message to the market: it’s every country for itself again. (NewMax)
Somehow the market missed the important message:
The oil markets … already seem to have forgotten about the failed Doha summit this weekend, with WTI and Brent regaining all of the ground it lost over the past two days or so. (Oilprice.com)
Yes, they have. The oil market dropped for less than a day, and then it yawned for the rest of the week, as if it couldn’t care less about the long-anticipated Doha meeting.
On Sunday, many thought the collapse of Doha would have provided that catalyst, leading to a sell off when the markets opened on Monday. Instead, prices only moved down briefly before bouncing back up. The most likely reason is that oil traders saw other geopolitical events that more than made up for Doha. First came the news that oil workers in Kuwait knocked off somewhere around 1.5 million barrels of oil production per day (mb/d).
Many shocked by how the Doha deal turned out
Who would have thought that Saudi Arabia and Iran would have killed off the chances of a deal to stop oil prices and therefore share prices slumping? (Switzer Daily)
I wasn’t surprised by that at all. I was absolutely certain this was 1) a deal the wouldn’t happen and 2) a deal that wouldn’t accomplish anything even if it did happen. However, I was also as certain as everyone that, if the deal didn’t happen, oil prices would crash. And I was wrong!
Tyler Durden at Zero Hedge saw the collapse as inevitable as I did:
The most anticlimiatic culmination to the most farcical “agreement” of 2016, one which could have been seen a mile away by any carbon-based trader not housed in a collocated, supercooled facility in Secaucus, has taken place and here is the “shocking” result: OPEC, NON-OPEC MINISTERS FINISH OIL TALKS IN DOHA, NO AGREEMENT – RTRS
While the failure of the meeting seemed likely to the point of obvious, what it did to oil prices surprised just about everyone.
Naturally, nearly everyone I read also thought the stock market would go down in response to a failure of Doha meeting since the market has been tracking in lockstep with the price of oil. However, since oil did the opposite of what people on both sides expected, the market did its thing of following oil and went up, too.
Stock investors gush over oil’s spurt
The stock market got a case of the thrills when Doha hit ground and oil prices rose anyway. The Dow jumped up to 18,000, breaking significantly beyond that downward trend line I mentioned for its ceiling. That’s a major breakthrough that defies my statements earlier that this was just a bear-market rally.
But does the strengthening in the price of oil and the resulting jubilance in the stock market make any sense? In my opinion, it proves both markets are running on the fumes of euphoria and wishful thinking. The end of the Doha meeting spelled nothing but trouble for oil prices.
I should point out that oil didn’t go up because Doha ran aground; it went up in spite of Doha’s failure. It went up because a strike in Kuwait promised a sudden drop in oil production. I would say the failure of Doha far outweighs a strike in Kuwait. So, when I see oil go up because of Kuwait, after such a major failure to resolve the core problem, I see a market that has lost its last attachment to rationality.
The strike that turned oil and stock markets all giddy, didn’t even survive twenty-four hours before its threat to oil production in Kuwait went kaput. That’s when irrationality sailed off the charts: Since a strike in Kuwait caused the price of oil to go up immediately after Doha’s failure, oil should have crashed hard as soon it became clear the strike was over and did NOTHING to limit Kuwait’s production; but it didn’t. Once again, oil breathed a big ho-hum, and has remained in its raised price zone for days afterward.
This kind of irrational exuberance either reeks of stupidity or else market manipulation. (No one ever said, however, that markets were either smart or rational; but the more irrational they are, the shakier the economy, as stupidity never leads to consistently positive results.)
And, then, as if all of that was not irrational enough, the failure at Doha led to threats that there major oil producers will actually increase production out of spite … and the prices of oil still stayed up!
Production increases planned in retaliation for Iran’s refusal to join production freeze
After [Saudi Arabia’s] comments thwarted supply negotiations in Doha, oil traders are weighing another implied warning from the Saudi deputy crown prince: the threat of an intensifying clash with Iran over market share…. “It was an indication to Iranians that, look guys, if you’re not joining the table we have enough power to crank up production,” Abhishek Deshpande, an analyst at Natixis SA in London, said in a Bloomberg Television interview Monday. “You can question how much more they can crank it up by, but the chances are that, now there’s no freeze, the Saudis will go ahead and increase their production as they were planning.” (Newsmax)
Saudi Arabia has said a few times that it has the capacity to easily increase production by about a million barrels a day.
“Saudi Arabia’s refusal to sign the agreement just proves that they would not mind if prices stay lower for longer,” Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt, said by e-mail. “I would not even be surprised if they hike production further as a ‘revenge’ to Iran’s reaction. They can withstand lower oil prices longer than most of the other producers.”
But to that, oil breathed another underwhelming ho-hum. Then Russia threw out a similar threat this week:
Russia said it was prepared to push oil production to historic highs, just days after a global deal to freeze output levels collapsed…. “They (Saudis) have the ability to raise output significantly. But so do we,” Russian Energy Minister Alexander Novak told journalists…. He said Russia was “in theory” able to raise production to 12 million or even 13 million bpd from current record levels of close to 11 million bpd. (NewsMax)
Again, oil sighed a h0-hum.
Venezuela fears that this game of Saudi Arabia getting revenge on Iran for not joining and Russia getting revenge on Saudi Arabia if they do increase production will cause a crash in oil prices between now and the next meeting. Venezuela’s oil minister suggested oil prices may go back down to $30 per barrel before next month’s meeting in Vienna.
“I anticipate that, without a deal, prices from now to OPEC will drop and it’s not the same to sit down at the table with Brent at $43 per barrel as it is when it’s below $30…. We are close to 90 percent of inventory levels already. … We could see a steep fall in oil prices in the next few weeks.“
And oil prices breathed another ho-hum.
As if all that were not enough, it turns out that, during the run-up to the Doha meeting, the major players have already been ramping up production since no agreement was actually yet in place. All they had (as I’ve pointed out) was an agreement to TALK about limiting production:
First it was the Saudis; then Russia announced another month of record oil production. And now it is Iraq’s turn. According to the state-run Oil Marketing Co., Iraq increased crude output to a record level in March, ahead of the long-awaited April 17 meeting in Qatar…. The 500,000 barrel increase in monthly barrels has made up almost entirely for the 600,000 barrel decline in US shale output….
An expansion at Saudi Arabia’s Shaybah field should add 250,000 barrels a day as early as June, while the Khurais field could contribute another 300,000 barrels by the end of 2017. State-owned Saudi Aramco says this will let it … maintain a production capacity of more than 12 million barrels per day, 2 million barrels above its current rate. For Kuwait and the U.A.E., the goals are even higher. Kuwait plans to raise production capacity by 5 percent from 3 million barrels a day by the third quarter, and to reach 4 million barrels by 2020. Abu Dhabi means to lift production capacity to 3.5 million barrels a day by 2017 from about 3 million. (Zero Hedge)
So, production has done nothing but expand in the Middle East during the past two months by more than enough to offset any falling production in the West. Most players in the Middle East are activity planning additional production increases. A meeting to freeze production at these ever-increasing levels failed completely. Two of the major players have now stated they are thinking seriously about ramping up production even more …. And oil prices keep floating upward.
Someone must have programed the algorithms of the robo-buyers to go up no matter what the news is for oil’s over supply. It is almost as if the more the Middle East does to expand production, the more the prices of oil rise.
I think most readers here know or have, at least, heard that irrational exuberance is a precursor to all great market crashes. If the above scenario is not proof that market exuberance has reached the zenith of irrationality, I’m not sure that anything could provide proof in the face of such irrationality, for it is the irrational who will be judging the proof harshly.
More post-Doha reading on oil wars and oil price wars:
- Chris P