CRUDE markets are in a flux. While the dollar weakened, the Chinese currency yuan and other currencies gained strength – resulting in prices rising. Oil prices soared overnight Friday, following US Energy Information Administration data that showed a much larger-than-expected drawdown in gasoline stocks last week, suggesting robust energy demand in the US. The 4.5 million-barrel decline in US gasoline stocks however, outweighed the 3.9 million-barrel growth in crude inventories. In a statement Wednesday, the EIA had also said US monthly crude production in December reached its lowest level since November 2014, and production also declined from year-earlier levels for the first time in more than four years. "US crude oil production averaged an estimated 9.4 million barrels per day in 2015, and it is forecast to average 8.7 million barrels per day in 2016 and 8.2 million per barrel a day in 2017," the agency said. Yet, in the shorter term, markets remained focused on a proposed meeting of oil producers – to formalize some sort of output arrangement to stabilize the crude markets. However, in the wake of Iran insisting it was not ready to accept any output cuts, the debate, if the meeting would eventually take place or not, kept the markets on tenterhooks. Oil markets thus remained on heels, reacting to virtually every move, in this context. Doubts are now emerging about an earlier reported, March 20 meeting of major Opec and non-Opec oil producers. Reuters, citing sources, said the meeting between Opec and non-Opec producers was unlikely to happen on March 20, as Iran was yet to commit to an oil production freeze regimen. Iran was yet to say whether it would participate in a potential pact to freeze production or not, Reuters reported citing unidentified sources. Saudi Arabia, Russia, Qatar and Venezuela agreed on Feb.16 in Doha they would freeze output if other producers followed suit in an effort to tackle the oversupply. "Iran is not committing itself to production cuts and that's helping push the market lower," Michael Hiley, head of OTC energy trading at New York-based LPS Partners was quoted as saying. "The market's been hoping that there will be some kind of deal being reached between Opec and non-Opec countries." The oil-producer confab had been viewed by markets as a crucial step to getting more producers, including Iran, to agree to production cuts. Kuwait too indicated last week it may not be ready to participate in any such arrangement, unless Iran also joins. And with Iran not in the tent, not everyone seemed convinced to act. Phil Flynn, senior market analyst at Price Futures Group hence was of the view: "If this is a breakdown of the agreement to freeze production it would be a big deal for oil markets because the market had priced in production cuts." Crude oil prices could fall by $10 per barrel, erasing recent gains, if Opec and non-Opec countries fail to finalize a plan to freeze output levels, Norwegian brokerage DNB Markets predicted on Thursday. "If they can agree on a production freeze I think we have seen a bottom. If they fail, I think the oil price will drop $10 per barrel again," DNB Markets analyst Torbjoern Kjus told an energy conference in Oslo. Tim Evans, chief market strategist at Long Leaf Trading Group but emphasized "the member nations that are willing to move forward with this plan realize that if Iran does not participate, then the desired outcome won't be realized and each participating member would lose." A meeting of Latin American oil producers originally scheduled to take place in Quito, Ecuador, on Friday has also been reportedly postponed until at least late March or early April, government news agency Andes reported, citing Oil Minister Carlos Pareja. Although, officially, the gathering was delayed because of scheduling difficulties, yet, Pareja said on Wednesday he was seeking regional consensus to cut or freeze oil output. And demand destruction also continues to weigh considerably on market sentiments. Despite the fact that China imported record crude volumes of 8 million barrels per day (bpd) in February, analysts now expect this figure to fall as the Beijing scales back buys for its strategic reserves, and car sales begin to fall as the sharp economic slowdown starts to show results. Faltering demand in China, where the economy is growing at its slowest pace in a generation, is also causing concerns to the markets. China's February trade performance was far worse than economists had expected, with exports tumbling the most in over six years. Goldman Sachs is hence of the view that the current rally is not a long-term phenomenon. There's been a "premature surge" in commodity prices that is "not sustainable," Goldman argues in a new report published last Tuesday. In fact, the influential investment bank warns the current oil rally could do more harm than good to future prices. "Energy needs lower prices to maintain financial stress to finish the rebalancing process," Goldman commodities head Jeffrey Currie wrote. "Otherwise, an oil rally will prove self-defeating." That's exactly what happened a year ago. Oil prices appeared to have "bottomed" last March at around $43 a barrel. By early May they had surged back above $60 a barrel. Of course, that rally proved to be a head fake - one that only encouraged global oil producers, especially price-sensitive US shale companies, to keep pumping. The same thing could happen now if the rebound in oil prices allows struggling shale producers to avoid financial stress (like bankruptcy or fire sales) and keep the pumps going. That would only deepen oil's huge oversupply problem. Just last week in the midst of the oil rally investors learned that US stockpiles of oil rose by another 3.5 million barrels to nearly 508 million barrels. "The current oil market is still in a large surplus," Goldman wrote. "Higher prices are much harder to sustain in a supply-driven market since supply is primed to return with higher prices. But this lesson will likely only be learned through false starts." Markets thus continue to be in a state of flux – not out of stress – as yet. Good days are still some distance away!
