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Representatives from a large group of national oil companies, both Opec and non-Opec, met in Doha last weekend, ostensibly to see if they could mutually agree not to raise their oil production from current levels.
From a practical economic view, the conclave made little sense. Because all the countries involved are strapped for cash, they’re already producing flat out. The only exception is Iran, which declined to participate. It is ramping up its output for the first time in a long while now that sanctions are being lifted, and has no intention of stopping.
It was clear from the outset that the best outcome would be an agreement where the parties said they wouldn’t do what they couldn’t do anyway. So Doha was all about optics, about satisfying internal political demands that the local oil ministries were leaving no stone unturned. Weird, maybe, but understandable if you’re an oil functionary who wants to keep his job.
Nevertheless, there was an immediate spike down in the oil price when failure to reach agreement was announced. To my mind this was more traders playing games in the market than an expression of dismay.
–crude oil prices are higher today than they were before Doha, and
–Brent crude, a proxy for non-US demand for oil (because it can be used in older refineries), is beginning to establish its traditional premium over West Texas Intermediate.
We passed the seasonal low point for oil demand in mid-February and are entering the strongest seasonal period now. So it makes some sense that the price should be strengthening.
The Brent premium suggests US drivers aren’t the only ones consuming more oil products. The lower price may also be stimulating usage in the rest of the OECD, where petroleum taxes are much higher.
The (crazy) period of securities trading where low oil was thought to be a harbinger of recession appears to be behind us.
My guess is that traders will continue to search for a price ceiling, which I think is around $50 a barrel.
I wonder if the major non-government owned oil companies have been holding back production on the idea that prices are too low, thereby, consciously or not, aiding the recovery process. This wouldn’t be much different from how these firms acted during the period of oil price controls in the US in the 1970s -1980s.
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