The two most powerful men in the world oil market appeared together in Houston on Tuesday to tell the world that their strategy was on track.
In December, Khalid al-Falih and Alexander Novak, the energy ministers of Saudi Arabia and Russia, orchestrated a 24-nation plan to cut oil output in the first half of 2017. This week they spoke to reporters in a hotel conference room at the annual CERAWeek energy conference to emphasise their commitment to the pact.
Despite their reassurances, the US oil price suffered its sharpest one-day sell-off for 13 months on Wednesday, and has fallen 7 per cent over the week. After months floating sideways, West Texas Intermediate crude is now trading below $50 for the first time since December.
The impression of price stability was held in place by three forces: Opec, hedge funds and shale oil producers in the US. The fragile balance now appears to be unravelling and augurs volatility ahead.
While Mr Falih described compliance among the Opec members and other parties to the production cut agreement as “very satisfactory”, the oil market was jolted on Wednesday when government data showed that crude stocks in the US had climbed a ninth straight week to a new record.
Contributing to the gains in crude oil stocks were rising estimates of imports landing from Saudi Arabia, Iraq and Nigeria, all members of Opec.
The big question for Opec now is whether the parties decide to extend their agreement beyond June. Mr Falih said that decision, expected at the cartel’s ministerial meeting in May, would hinge on how much inventories had declined and whether members were keeping their promises. He was careful to suggest that an extension was by no means a done deal.
“In fixed income, they talk about being in a Fed market. We’re in an Opec market right now,” said a hedge fund manager who trades oil.
This manager was among those invited to see Mohammad Barkindo, the Opec secretary-general, who has held a series of meetings with hedge funds over the past several months.
Mr Barkindo said at CERAWeek that the funds had become such a large part of the oil market he could no longer ignore them.
The fund manager described Mr Barkindo’s meetings as a “charm offensive” to convince traders the Opec agreement would succeed in reducing oil stocks in industrialised countries by 300m barrels. “He is doing everything he can to get the message out,” the manager said.
The message has been persuasive: money managers’ net purchases of crude oil futures doubled from November to record highs late last month. During the same period, commercial merchants have sharply accumulated short, or selling, positions to hedge the value of the oil they have stored in tanks.
Jason Lemme, managing director at Hartree Partners, a New York-based commodities trading house, said on Monday that “this flow of futures we have right now is potentially setting up a massive jolt to the price of oil, depending on which one of these two overstretched categories moves first.” His warning now looks prescient.
The third force unsettling oil markets has been the US shale oil industry, whose ability to increase rapidly and curtail output has challenged Saudi Arabia’s traditional role as a swing supplier.
Mr Barkindo dined in Houston on Sunday evening with the chief executives of some of the leading shale oil producers including Hess, Pioneer Natural Resources, and Continental Resources. During the conference there was talk about how Opec and the shale industry had discovered a route to peaceful coexistence.
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“I think everybody realises that we have a great deal of potential in this country,” Harold Hamm, Continental’s chief executive told the conference, “but we also have the potential to oversupply the market, and we have a great responsibility not to do so.”
Although there was plenty of talk at CERAWeek of a “truce” between Opec and the shale producers, the reality is that the competition is still brutal.
Emboldened by the stability of crude in recent months, US producers have been stepping up activity sharply.
The number of rigs drilling the horizontal wells used for US shale oil production has more than doubled from a low of 248 in May last year to 513 last week, according to Baker Hughes, the oilfield services group.
Ryan Lance, chief executive of oil producer ConocoPhillips, suggested the US industry’s comeback after the downturn of 2014-16 was exceeding expectations.
“How many would have predicted 500 rigs? We would have thought 500 rigs by the end of the year, not 500 rigs by the end of the first quarter,” he said.
In his address to the conference, Mr Falih said that stabilising prices would benefit the US oil industry as well as Opec members. US producers agree. But the tensions in the market will make it difficult to maintain that stability.
