Thursday, February 25, 2016
West Texas Intermediate (WTI) crude oil posted a three-day gain of 14.4% the week ended Feb. 20, the biggest three-day gain in about six months for the S&P GSCI index, notes Jodie Gunzberg, global head of commodities
and real assets at S&P Dow Jones Indices. She notes that gains of this magnitude have only happened following near perceived oil price bottoms.
“After the index hit its lowest since Nov. 4, 2003, on Jan. 20, 2016 it capitulated, reaching near that level again a few days ago on Feb. 11,” she observes. “Then oil spiked on news of the possibility of a production freeze from OPEC and non-OPEC producers, but quickly waned after hopes diminished and the reality of the lack of potential impact hit.” Gunzberg comments that OPEC has the ability to be the swing producer given its large market share, spare capacity, low production costs, and capability of acting alone or as a cartel. However, U.S. inventories need to be low for any OPEC action to matter.
She adds that on Feb. 18 the American Petroleum Institute reported an unexpected decline in U.S. inventories that excited the market. But production coordination among U.S. shale producers is difficult since there are too many players that are always aiming to produce as much oil profitably as possible.
“Without the decline in inventories from the U.S., the potential impact of an OPEC production freeze is far less,” Gunzberg says. “This makes the U.S. inventory arguably more important than the production decisions of the swing producer, Saudi Arabia, but as the U.S. inventory drops, the picture may shift the oil price power back toward Saudi Arabia.”
and real assets at S&P Dow Jones Indices. She notes that gains of this magnitude have only happened following near perceived oil price bottoms.
“After the index hit its lowest since Nov. 4, 2003, on Jan. 20, 2016 it capitulated, reaching near that level again a few days ago on Feb. 11,” she observes. “Then oil spiked on news of the possibility of a production freeze from OPEC and non-OPEC producers, but quickly waned after hopes diminished and the reality of the lack of potential impact hit.” Gunzberg comments that OPEC has the ability to be the swing producer given its large market share, spare capacity, low production costs, and capability of acting alone or as a cartel. However, U.S. inventories need to be low for any OPEC action to matter.
She adds that on Feb. 18 the American Petroleum Institute reported an unexpected decline in U.S. inventories that excited the market. But production coordination among U.S. shale producers is difficult since there are too many players that are always aiming to produce as much oil profitably as possible.
“Without the decline in inventories from the U.S., the potential impact of an OPEC production freeze is far less,” Gunzberg says. “This makes the U.S. inventory arguably more important than the production decisions of the swing producer, Saudi Arabia, but as the U.S. inventory drops, the picture may shift the oil price power back toward Saudi Arabia.”
