If there’s been a prevailing theme for financial markets so far in 2016, it’s been volatility in global crude prices.
Like a cat on a hot tin roof, they’ve been all over the place.
From October 2015 to January 2016, front month Brent crude futures — the global benchmark — fell by 50%. From that nadir, the price doubled over the next five months before tumbling yet again, sliding 22% to the most recent low of $41.51 a barrel struck on August 2.
It has subsequently rallied by over 20% in recent weeks, driven in part by hopes of a production freeze being announced by OPEC at its upcoming meeting in late September.
The daily chart below from Thomson Reuters shows just how how wild the price action has been so far in 2016. If the swings weren’t enough to convince you, the average daily movement — either up or down — currently stands at a giddying 2.32%.
Wild in anyone’s language.
According to Adam Longson, head of energy commodity research at Morgan Stanley, the price action may get even more whippy in the lead up to the informal meeting of OPEC member countries in Algeria scheduled to begin on September 26.
“The market treats OPEC as the central banker of oil where simple jawboning can move markets and scare off shorts,” wrote Longson in a note released on Monday. “With more than a month until the International Energy Forum in Algeria, markets may lose interest in prognosticating a deal.
“However, as the meeting approaches, it would not be surprising if market chatter and volatility increased.”
While many are obviously speculating that a deal to freeze production may ensure — the recent bullish price action says so — Longson believes that “meaningful OPEC production agreement as highly unlikely”, suggesting that there are simply “too many headwinds and logistical challenges to a meaningful deal”.
Given past statements by OPEC and its members regarding the positive state of markets, domestic output goals and objections from members producing below potential, a true deal seems unworkable. Even a new headline group quota may be a difficult. Even if an agreement to freeze production were reached, this would do little for international markets. OPEC supply is currently at record levels, spurred by both seasonal increases in domestic demand and members’ current market share maximisation policies.
The chart below from Morgan Stanley shows current OPEC production levels compared to levels seen in previous years.
Longson also suggests that markets have misinterpreted recent comments from Saudi Arabia that fueled speculation that a production freeze from OPEC nations may be forthcoming at its September meeting.
Oil Minister Al-Falih has said “We are, in Saudi Arabia, watching the market closely, and if there is a need to take any action to help the market rebalance, then we would, of course in cooperation with OPEC and major non-OPEC exporters.” This is the same talking point the kingdom has been using for some time. It neither acknowledges the need for action, nor firmly commits Saudi Arabia to participate if certain parameters are met.
Few OPEC members have expressed a need for a freeze, with the exception of Venezuela. Members with production outages have been less supportive of a production freeze this time as well, with Nigeria now joining the dissent.
Longson believes that the recent bounce in crude prices has been driven by “more technical and positioning-oriented” factors rather than on fundamentals.