Oil freeze talks collapse
The failure by oil-rich nations to agree to freeze production weighed on crude prices on Monday. But analysts say oil is likely to rise in the longer term as many companies, particularly in the United States, scale back output.
The effort to reach a consensus on limiting production to support prices failed after Iran stayed away from a weekend meeting of 18 oil-producing nations in Doha, Qatar.
Saudi Arabia said it would not back a deal if regional rival Iran, which is trying to ramp up output as international sanctions are lifted, was not involved.
The price of oil fell as much as seven per cent after the talks ended but then bounced back. The contract traded in New York closed down 58 cents, or 1.4 per cent, at US$39.78 a barrel Monday, while the international standard, Brent, fell 19 cents to US$42.91.
The cost of oil has fallen in the past two years from above US$100 a barrel to touch 12-year lows below US$30 this year, before picking up in recent weeks.
The inability of OPEC countries and Russia to freeze production levels means they will likely continue to pump oil at near-record rates. However, other producers - notably US shale companies - are cutting back on production to cope with the lower prices and some have even gone bust. That has the potential to support prices.
Last week, before the Doha meeting, the US Energy Department and the Paris-based International Energy Agency both reported that US production was declining.
The IEA noted signs that "the much-anticipated slide in production of light, tight, oil in the United States is gathering pace." It added that by early April the rig count in the US had fallen nearly 80 per cent from the peak seen in October 2014 and that more anecdotal evidence is emerging of "financial problems taking their toll on the shale pioneers."
Lower potential US supply is one of the reasons why oil prices have rallied more than 60 per cent since their early year lows - alongside expectations of some sort of deal emerging at the meeting in Doha.
Fadel Gheit, a senior energy analyst at Oppenheimer & Company, said the recent cutbacks in investments will help rebalance supply and demand in the longer-run whatever the short-term disruption caused by the Doha failure.
"We believe prices will rise regardless of what OPEC does or does not do, as US shale oil production, not Saudi Arabia, will be the new swing producer," Gheit said. "We believe oil prices will rise to a sustainable level closer to US$60, the new normal, not US$100 and not US$40 either."
The failure of the talks in Doha prompted a knee-jerk response in the markets that was tempered perhaps by news of a strike by oil workers in Kuwait to protest government cutbacks.
The market volatility appears driven, in part, by speculative investors, "oil tourists" who drive the price up and down on expectations about things like the Doha meeting, said Kit Juckes, a strategist at bank Societe Generale.
In the longer run, he said, oil prices will be supported "as slowly increasing demand catches up with slowly decreasing supply and stock-building comes to an end".
One likely impact of the Doha talks' failure is that traders may scale back expectations that a deal will emerge in the future, starting off with the next scheduled OPEC meeting in June. Rather than coordinated production cuts by the cartel, the market may see unilateral actions from individual countries.
The cheap oil price has a huge impact on the economies of crude-producing countries, particularly the poorer ones like Angola, Nigeria and Venezuela.
"Unless Saudi Arabia or Iran has a change of heart, we fail to see how the outcome (at the June meeting) will be any different, and it may ultimately be mounting supply disruptions in stressed states, rather than collective cartel action, that causes an accelerated market rebalancing," said Helima Croft, global head of commodity strategy at RBC Capital Markets.