NEW YORK, April 19, 2016 /PRNewswire/ -- Current price levels for oil will be unsustainable after oil producers failed to seal a freeze deal in Sunday's meeting says Toronto, Canada and Tokyo-headquartered Monex BMO Securities.
The sheer weight of expectation attached to a positive outcome at the recent meeting of the world's largest oil producers means more pressure on oil prices now that they have failed to reach consensus on a deal to freeze their collective output at January levels and to reassure markets that a recent recovery in prices could be sustained.
Much of the 40+% rally in crude prices since the January lows was deeply rooted in the hope that more than a dozen large oil producers can build on a preliminary accord reached between Russia, Saudi Arabia, Qatar and Venezuela on February 16.
The aim was for OPEC and non-OPEC producers to keep their output at levels no higher than they were in January in the hope of drawing a line under prices which had slumped to 13 year lows near $25 a barrel since June 2014. Much of the decline below $60 a barrel is widely attributed to Saudi Arabia and OPEC's refusal to cut production, preferring instead to preserve market share at all costs.
The object of the exercise was (and still is) to drive high-cost producers like the US shale oil drillers out of business by making their business model unfeasible. Much of the US shale industry needs prices above $60 a barrel to make hydraulic fracturing or "fracking" economically viable and, to OPEC's credit, US drilling rigs in operation have fallen to multi-year lows. Nonetheless, so efficient has the shale drillers' technology become that overall production has largely remained steady throughout and has only recently started to fall as more US energy companies go out of business or shutter wells to cut costs.
At least 15 countries were represented at the April 17 meeting in Doha, Qatar including most of OPEC and non-members like Russia, Oman and Azerbaijan. Iran was conspicuous by its absence having tied an initial refusal to participate in any production freeze talks to its desire to rebuild market share lost while under sanctions imposed for defying the international community over its nuclear energy program.
"Despite the widespread optimism, with Iran not in attendance and many countries with differing agendas the outcome disappointed and didn't produce any agreement to keep quotas where they were at the beginning of the year," says Anthony Russell, Senior Vice President at Monex BMO Securities who oversees the allocation of $10bn of Corporate clients assets. "We've advised institutional clients to avoid oil futures speculation at anything above $35 a barrel.
"There is a lot of upside potential in oil but it will not be a supply or demand story. We think a gradual weakening of the US dollar will play a large factor in oil prices heading higher during the course of this year. In the short term, however, after this meeting ended in delegates squabbling and no agreement, it really will be a case of 'look out below' for oil prices."
Monex BMO Securities is a privately held, fully independent investment and wealth management leader, with retail operations based in Toronto, Canada and corporate trading division headquartered in Tokyo, Japan.
SOURCE Monex BMO Securities JLLC