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Analysis: Oil traders yawn at triumphal OPEC, ministers say trust the process

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Analysis: Oil traders yawn at triumphal OPEC, ministers say trust the process

Vienna — OPEC and its partners came into their meetings this week in Vienna aiming to show the oil market some muscle; they left with oil prices falling.

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The 24-country coalition, which controls almost half of the world's oil production, renewed its 1.2 million b/d supply cut agreement for nine months instead of the previously mooted six, sending "a strong signal to the market that underlines our resolve," Russian energy minister Alexander Novak said.

And a charter to cement the OPEC/non-OPEC alliance was signed with great fanfare, making permanent "one of history's strongest producer partnerships, spanning the entire world, from east to west, and which has committed itself to promoting market stability on an ongoing basis," Saudi energy minister Khalid al-Falih said.

Traders were less than impressed, sending oil prices down after Tuesday's meeting concluded, wit ICE September Brent down by over $2/b Tuesday afternoon.

But ministers insisted that brighter days were ahead. Demand should start picking up in the summer, and continued production restraint on the part of OPEC and its allies through to March would help prevent a potential inventory build of 100 million barrels during the winter months, Falih said.

"Thinking in terms of the next nine months, you are going to see the fundamentals moving solidly in the right direction," he told reporters. "What I can predict is that we can see inventories going down."

Saudi Arabia was already prepared to do its part, the minister said Monday, with the kingdom overcomplying with its cut commitment by some 600,000 b/d. As a whole, the entire coalition achieved 168% compliance through the first half of the year, it said.

And to further demonstrate its determination, Falih suggested that the coalition would replace its target of lowering OECD oil stocks to the five-year average with a more aggressive benchmark of the 2010-2014 average, though he later walked that back, saying it was one of "a spectrum of metrics" being considered.

When compared with the current five-year average, the overhang of OECD stocks was about 25 million barrels as of May. But compared to the 2010-2014 average, the overhang was a much more robust 214 million barrels, he said.

However, some countries were less enthusiastic about the change, fearing the market could become too tight, according to sources familiar with the talks.

Production from Iran and Venezuela -- both hit by US sanctions -- is expected to decline in the months ahead, and some countries are wary of ceding too much market share to US shale producers if cuts are extended further or deepened.

"We have discussed various different metrics, including longer periods to calculate the average benchmark of inventory levels," Novak said. "For 2010-2014, of course, we need to keep in mind that demand since then has grown significantly, and we need to be as objective as possible in setting targets."


Ministers maintained they intend to be flexible with their approach, and that the nine-month cut extension would not be a case of set it and forget it.

To keep its finger on the pulse of the market, the coalition said its delegate-level Joint Technical Committee would begin meeting monthly, instead of every other month. The JTC is charged with monitoring market fundamentals and advising the nine-country Joint Ministerial Monitoring Committee, which will next meet in September on the sidelines of the World Energy Congress in Abu Dhabi.

Both the JTC and the JMMC are co-chaired by Saudi Arabia and Russia, the two largest producers in the OPEC/non-OPEC coalition by far.

OPEC's next full meeting is December 5 in Vienna, with the non-OPEC partners joining talks on December 6.

Jamie Webster, a fellow at Columbia University's Center on Global Energy Policy, said the monthly JTC meetings could be "part of a push towards greater professionalization of the organization and a recognition that high frequency data can be better accommodated with higher frequency discussions."

With oil market fundamentals still clouded by trade disputes and geopolitical risks, along with rising US production, OPEC and its partners will have to remain nimble. S&P Global Platts Analytics forecasts a tighter market through the end of the cut agreement, with prices headed toward $70-$80/b, but warned that compliance with the cut agreement could wane as prices rise.

Market volatility was impossible to eliminate, and "complex and rapidly changing dynamics are here to stay," Falih acknowledged.

A more robust, formalized OPEC/non-OPEC coalition with a longer-scale perspective will be better equipped to handle the tricky landscape, which is why this week's meetings in Vienna were so vital, he said.

The market, however, still needs some convincing.

(Corrects reference to EIA report in fourth paragraph)

-- Herman Wang,; Rosemary Griffin,; Eklavya Gupte,; Miriam Malek,

-- Edited by Gary Gentile,