WWM - Analytics

    WWM

    155.25 5.25/10
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    Euphoria Deflated, Oil Falls below $31, $30, $29 and Recovers $29

    The rally in crude oil ran out of energy today when it became clear that the production deal between Saudi Arabia and Russia would do little to address the supply and demand imbalance that has collapsed the price of a barrel since last summer.

    The talks between the two leading oil producers which were reported late last week had been the catalyst for the more than 20 percent surge in the price of crude since Thursday.

    Crude oil's eight percent rise on Friday after talks were reported between OPEC members and Russia,  continued into today’s European trading, including a spike to  $31.53.  

    The existence of the talks became moot today after the terms of the agreement were published today.

    The agreement between the two countries is a production freeze at current levels not an absolute cut.

    Russia and Saudi Arabia are already producing at high capacity. For the past nine years both nation have maintained production at very high output.  Sustaining these levels will do little to buoy prices. 

    During this time Iranian and Libyan production has gone off-line while U.S. and Canadian shale output has soared.

    With Iran set to rejoin the global market after the lifting of sanctions and North American producers waiting for a price rise to resume full scale production, it is these participants who will determine prices, not Saudi Arabia which has spare capacity and Russian which does not. 

    The production cap was probably all that the Saudi Arabia and Russian could agree.  The finances of each nation are almost wholly dependent on oil revenues.   Even if the current low price succeeds in removing U.S. shale producer temporarily from the markets, the basic oversupply created by over five years of oil above $80 dollars a barrel, and almost a decade of zero rates, is not going away. 

    For the oil patch a cosmetic production deal is worse than no deal at all.

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

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