Traders anticipating a resolution to the ongoing supply imbalance in the energy space were dealt another blow on Sunday as the producers attending the conference in Doha, Qatar left the meeting without a deal to freeze production.
Already since the weekly reopening, crude oil prices have plunged, with West Texas Intermediate tumbling back below $40.00 per barrel, slumping -4.56% to $39.81 per barrel while Brent has slipped -4.25% to $41.27.
With no compromise reached amongst key global crude oil suppliers, the stage is now set for production to rise as parties fight for market share, likely translating to increased price competition. The overwhelmingly bearish outcome of the meeting paves the way for additional constraining of onshore storage availability and furthermore, another round of pricing pressures.
Doomed From the Outset
It was worth noting that before the meeting began there was an atmosphere thick with tension after Iran bowed out of participation in Doha, underlining its unwillingness to freeze production under any circumstances as it works to bring exports back to pre-sanctions levels.
From the Saudi Arabian perspective, there would be no output freeze without the participation of Iran. Thanks to growing political and economic hostility between the two nations, even the upcoming June OPEC meeting is unlikely to produce any major breakthroughs that reduce the level of acrimony.
Aside from the ongoing conflicts in Syria and Yemen that pits the sides against one another, the energy revenue side of the equation is essential to pacifying any emerging social unrest in either nation.
Easing or freezing production is not an option if prices keep falling, especially for nations dependent on the revenues to support government budgets. As a result, recent comments about the pace of extraction and exports are increasingly important, notably remarks from key Saudi Arabian officials.
According to the Deputy Crown Prince Mohammed bin Salman, the Saudis could add another 1 million barrels per day in output and even raise the total to 12.5 million barrels per day with very little effort.
A move of this nature is likely to drive an additional wedge between OPEC cartel members that are already struggling to survive in a low price environment.
OPEC in Disarray
While once a functional cartel that had substantial market sway, OPEC’s influence continues to wane over time as infighting amongst members and different visions for the pace of production creates excessive strain on the foundations.
With many members opting to exceed output quotas and failing to find a compromise that would improve the standing of the entire cartel, the future for the group is rather bleak.
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However, as the conclusion to the Doha meeting suggests, cooperation is a big ask from certain members.
The group’s production has only risen further over time, reaching 32.38 million barrels per day in March, thanks in large part to growing Iranian production.
As the Saudis have clearly deduced from ongoing events, freezing production without penalties for producers that choose not to participate will only result in ceding market share to competitors. Backing off from current output levels to support prices might actually prove a net negative considering a backdrop by shrinking revenues should prices continue to fall.
The June OPEC meeting will be the next most watched event for the industry at large, as lack of compromise threatens to add to existing supply pressures. Additionally, should production rise further, finding buyers will become increasing challenging especially amid declining onshore storage availability.
Onshore Inventories Surging
The latest storage data made available by the US Energy Information Administration gives further credence to the idea that onshore storage is filling at a pace that might create an even more chaotic environment for prices.
Data released by the Department of Energy last week showed that onshore US inventories rose by another 6.634 million barrels in the prior week, climbing to 536.5 million barrels. Stockpiles remain near record highs and continue to approach the 80% working capacity threshold with most storage facilities currently above 70% capacity.
Although the summer US driving season should be a major catalyst for increased demand that will help draw down inventory levels from near record levels, increased output from other global producers could continue to fill the void.
Price Plunge Undiminished
The weekly reopening proved a bloodbath for traders with exposure to long positions after the “output freeze” narrative was defeated by an ongoing chorus of disagreement amongst major producers.
After falling the most in 7 months, the weakness in oil prices extended outside of the energy complex to the Canadian dollar which has fallen -0.91% against the US dollar with the USD/CAD pair climbing back towards the key 1.2934 psychological level.
Multinational companies with exposure to the oil exploration and production business have experienced a parallel drop in share prices, with BP falling -2.11% during the morning session in London to GBP 348.50.
US oil majors such as Exxon and Chevron are also likely to come under similar pressure during the pre-market session ahead of the New York open.