Oil: Markets disappointed with extension while inventory drawdown is the key – Lloyds Bank

Senior Economist, Carl Paraskevas at Lloyds Bank, explains that the decision by OPEC to extend cuts, although widely expected by analysts, came as a disappointment to the futures markets.

Key Quotes

“Perhaps the perceived cohesiveness of the group in preceding weeks leading up to the OPEC meeting raised hopes that more would be done to help balance the physical market. Some speculate that the market had priced in a combination of longer and deeper cuts or, at the very least, inclusion of Libya and Nigeria into the agreement. Others point to the lack of guidance in terms of future strategy once the new arrangement expires despite Russian and Saudi statements on doing whatever is necessary to balance the physical market. Beyond strict adherence to the arrangement and upholding a new pledge to reduce exports, there seems little OPEC or non-OPEC members can do to influence prices until their next meeting in November. At the very least, however, the extension helps to provide a degree of support to futures prices.”

“Inventory drawdown key

We were less surprised by the reaction to last week’s agreement. In our most recent Focus Energy: OPEC set to extend agreement, we outlined the limits to what OPEC and other producers could do to steer prices higher. Khalid Al-Falih, Saudi Arabia’s Energy Minister, indicated that global inventories should fall back to their five-year averages by early next year, whereas our estimates suggest by mid-year. Moreover, the risks to both global demand and supply elsewhere leave the risks to any inventory forecast skewed to the upside. Therefore, without deeper cuts, prices were unlikely to break out of their recent ranges because of OPEC alone. Yet even without further support from OPEC, our base-case assumptions are for global inventories to draw down by an average 1.4 mb/d in H2 2017. Such a level of market deficit should be sufficient enough for prices to move higher over the remainder of the year. The risks to our price forecast, however, are skewed to the downside.”