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Oil market volatility is becoming more evident by the week

Published: 12:24 09 Sep 2016 BST

oil workers on rig

The volatility in the oil market is more evident every week as headlines drive sentiment and hope rules the day.

The good news was the drop in US oil inventories last week and the increase in Chinese oil imports at around 7.7 million barrels a day.

In early trading on Friday, Brent crude was holding above US$49 with WTI finding strength around US$47 a barrel.

Earlier in the week Russia and Saudi Arabia reached an agreement during the G-20 meeting in China, to monitor the oil market.

Russia proclaims historic oil agreement

It was hailed as an “historic agreement” by the Russian energy minister Alexander Novak and by many in the media, but after reality sunk in, many analysts were left scratching their heads.

Only last week Russia made it clear there was no need for any collective action; this week the Russian President and the energy minister were keen to show support for their brothers in the Kingdom.

On the higher political level, President Vladimir Putin also met with the Saudi Deputy Crown Prince Mohammed bin Salman at the G-20 meeting and agreed they will monitor the markets.

The “significant announcement” was that both key energy players would set a joint working group to watch the oil market.

Half the world is watching oil

Half the world is watching the oil market these days; be it in organised groups or individually, so the new announcement may not alter the fundamentals or change the market direction.

It’s not every day that the higher authorities have publically taken such an interest in the market and Helima Croft, global head of commodity strategy at RBC says that with President Putin “putting his personal capital” behind this, a different element is added to the scenario than in previous dealings.

The concept of a production freeze is still a possibility when ministers meet on the sidelines of the International Energy Forum’s gathering in Algeria at the end of the month.

If Saudi’s production is frozen at 10.7 million barrels a day, this is still an extremely healthy high level of production for them. Russia is currently producing at around 11 million barrels a day.

Everyone needs to be cool with a freeze

The concept of a freeze will need all countries on board, and this might be an issue as in the past, as Iran and Iraq continue to increase production.

But with a couple of weeks to go, the situation might change.

The president of Prestige Economics in Texas, Jason Schenker is not convinced, “we do not expect a change in OPEC policy at the IEF meeting in late September, which would be price-bearish for crude oil prices.”

The newly appointed OPEC Secretary General Mohammed Barkindo has been on a serious meet and greet trip in the Gulf region, stopping off in Qatar to meet the country’s ruler as well as meeting with the country’s oil minister and OPEC 2016 President, Mohammed Saleh Abdulla Al Sada.

The energy minister from Algeria, Noureddine Bouterfa also joined the meeting and there are reports that Mr. Bouterfa will host a gathering with Mr. Barkindo and the Saudi energy minister, Khalid Al Falih in Paris on Friday.

The Secretary General also paid a visit to Iran this week to meet the country’s President Hassan Rouhani as well as the Iranian Oil Minister Bijan Zanganeh.

There he gained support for measures to stabilize crude prices, with the Iranians indicating they could manage a price around US$50-$60 a barrel. 

Eyes will be on oil diplomacy in Paris

Such a round of diplomatic meetings on behalf of the OPEC Secretary General is a different move for the office and is sending a clear signal for a new level of consultation to bring all producing countries together.

The market will be watching the rounds of diplomatic meetings by senior oil figures in Paris and beyond.

The personal involvement and the sense of urgency in advance of the bigger Algeria gathering will be commended, but the fundamentals still need a shift before the market welcomes a more sustainable price.

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