LONDON (AP) — The failure by oil-rich nations to freeze output hit crude prices Monday but many analysts say that, in the longer-term, oil is likely to keep recovering as many companies, particularly U.S. shale producers, scale back production plans.
The effort to reach a consensus on freezing production to support prices failed after Iran stayed away from a weekend meeting of 18 oil-producing nations in Doha, Qatar. Saudi Arabia said it wouldn’t back a deal if Iran, which is trying to ramp up output as international sanctions are lifted, wasn’t involved. Already frosty relations between the two countries worsened in recent months over a number of issues, notably the wars in Syria and Yemen in which they are backing opposing sides.
Though the failure to reach a deal means that OPEC countries and Russia will likely continue to pump oil at near-record rates, other nations are cutting back and that has the potential to support prices.
The sharp retreat in the price of oil over the past two years to around 12-year lows has prompted many companies, particularly U.S. shale gas producers, to rein in production plans. Some have even gone bust.
Last week, before the Doha meeting, the Paris-based International Energy Agency said there were signs that the oil market “looks set to move close to balance in the second half of this year” and noted signs that “the much-anticipated slide in production of light, tight, oil in the United States is gathering pace.” It added that by early April the rig count in the U.S. had fallen nearly 80 percent from the peak seen in October 2014 and that more anecdotal evidence is emerging of “financial problems taking their toll on the shale pioneers.”
Lower potential U.S. supply is one of the reasons why oil prices have rallied more than 60 percent since their early year lows — alongside expectations of some sort of deal emerging at the meeting in Doha.
Fadel Gheit, a senior energy analyst at Oppenheimer & Co., said the recent cutbacks in investments will help rebalance supply and demand in the longer-run whatever the short-term disruption caused by the Doha failure.
“We believe prices will rise regardless what OPEC does or does not do, as U.S. shale oil production, not Saudi Arabia, will be the new swing producer,” Gheit said. “We believe oil prices will rise to a sustainable level closer to $60, the new normal, not $100 and not $40 either.”
The failure of the talks in Doha prompted a knee-jerk response in the markets as it surprised some traders, particularly those speculating on a positive outcome from the meeting.
A barrel of benchmark New York crude was down $1.01, or 2.5 percent, at $39.35 while the international standard, Brent, fell 82 cents, or 1.9 percent, to $42.28. However, both had traded even lower earlier. New York crude was down 7 percent at one stage.
Kit Juckes, a strategist at bank Societe Generale, said the oil market is plagued by the presence of “oil tourists,” who drive the price up and down on sentiment about things like the Doha meeting.
In the longer-run, he said oil prices will be supported “as slowly increasing demand catches up with slowly decreasing supply and stock-building comes to an end.”
One likely impact of the Doha talks’ failure is that traders may scale back expectations that a deal will emerge in the future, starting off with the next scheduled OPEC meeting in June. Rather than coordinated production cuts by the cartel, the market may see unilateral actions from individual countries.
The cheap oil price has a huge impact on the economies of the more impoverished crude-producing countries, such as Angola, Nigeria and Venezuela. Even Kuwait is facing protests in the wake of planned austerity measures.
“Unless Saudi Arabia or Iran has a change of heart, we fail to see how the outcome (at the June meeting) will be any different, and it may ultimately be mounting supply disruptions in stressed states, rather than collective cartel action, that causes an accelerated market rebalancing,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
Elaine Kurtenbach in Tokyo contributed to this report.
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