Oil prices soared after Iran said they support efforts to stabilize the oil market.
While Iran’s oil Iran’s oil minister Bijan Zanganeh seemed to say they would not join other members in freezing output, they did say that OPEC understood their special situation. The market took this as a sign that there were some negotiations going back and forth to allow Iran to regain some market share that was lost under international sanctions. In other words, the road to a production freeze and eventually a cut, is still on track.
Critics of course are saying why would the Saudis allow Iran to get back market share. After all, the Saudis have no diplomatic and commercial ties with Iran after the flap over the execution by Saudi Arabia of a popular Shite cleric. That was met by the storming of the Saudi Arabian embassy in Iran. But the Saudis are feeling the economic pain and even the largest producer in the OPEC cartel is bleeding cash.
Even though they can get oil out of the ground cheaply, they still have an economy and a couple of wars they have to pay for. It is getting so bad that Saudi Arabia’s debt rating was cut by two notches to A- from A+ stable. This was the second time in four months that Saudi Arabia's debt rating has been cut by S&P. Other oil producers such as Bahrain lost its investment grade status and oil producer Oman was lowered to the last rating above junk status. Qatar's AA rating was affirmed.
The reason why all the major OPEC and non-Opec players are talking is they just can’t take it anymore. They are all going broke and fear that if they do not stabilize prices, the global economy will crack and they will all lose as oil demand falls. They are past their point of pain. The market knows the significance of these talks because if completed, it will be the first agreement between OPEC and non-Opec nations in 15 years. Back then there were many skeptics about that deal as well, but it led to a bottom in oil prices at levels we have not seen since.
The market’s reaction is so positive (see chart) because traders realize the historic nature of these talks and the progress that we have seen so far. This is a total turnaround from expectations from just a month ago. At that time it seemed like producers we digging in their heels on output. Many said they would not ever consider cuts or a freeze. Of course that was last month.
This comes against a backdrop of plunging cap x spending across the energy space. The latest big cuts come from Devon Energy that said it will lay off 20% of its staff in the first quarter of the year.
Oil also is getting support by a surprisingly bullish American Petroleum Institute (API) report. The API reported that U.S. crude inventories fell by 3.26 million barrels last week. We also saw a 2.02 million barrels drop in distillate supply. On top of that we also saw a very minor increase in gasoline supply of 750,00 barrels. Today we will see if the Energy Information Administration report that will be released today because of the President’s Day holiday. The Weekly Petroleum Status Report will be released on Thursday, February 18, 2016 at 11:00 A.M. and 1:00 P.M. (Eastern Time) due to the holiday.
Trying to find the exact bottom is hard we see the contango building signaling higher prices in the future. Just like 15 years ago, an OPEC/non-Opec agreement signaled a bottom and it could very well be doing that again.