Oil prices slid on Monday after a meeting between major producing nations on a proposed output freeze fell apart, leaving the world grappling with an excess of unwanted crude.No doubt about it, the Saudis want to inflict more pain on oil producers:
The some 18 oil exporting nations, including non-OPEC Russia, had gathered in the Qatari capital of Doha for what was expected to be the rubber-stamping of a deal to stabilize output at January levels until October 2016.
But the deal crumbled when OPEC heavyweight Saudi Arabia demanded that Iran join in despite its repeated assertions it would not do so until it had reached pre-sanctions levels of output.
"Saudi Arabia intentionally torpedoed the agreement and was willing to accept its failure. This has severely damaged the credibility of oil producers in general and of OPEC in particular," Commerzbank said in a note.
Brent crude futures fell almost 7 percent in early trading on Monday before recovering to $41.80 per barrel at 1047 GMT (0547 EDT), down just over 3 percent since their last settlement.
Traders said an oil worker strike in Kuwait that cut the country's crude output by some 60 percent prevented Brent from tumbling below $40 per barrel. A cut in U.S. drilling down to 2009 levels had prevented steeper falls there.
Benchmark U.S. crude futures were down by 3.62 percent at $38.90 a barrel after falling as low as $37.61 earlier in the day.
Brent crude had reached a four-month high of just under $45 per barrel last week on hopes that the freeze deal would slow ballooning oversupply.
Its collapse revived some fears that government-controlled producers will ramp up their battle for market share by offering ever-steeper discounts.
Morgan Stanley said the failure sparked "a growing risk of higher OPEC supply," especially as Saudi Arabia threatened it could hike output following the failed deal.
It could also impact the broader economy, thus putting demand at risk.
"In the near-term, lower oil prices are bound to weigh on investor confidence and could exacerbate financial volatility," said Frederic Neumann, co-head of Asian economics research at HSBC.
"Concerns over financial stability in the energy sector and a further fall in drilling capex are headwinds to growth against an already fragile global economic backdrop."
But others said OPEC's failure to act, and the subsequently lower oil prices, would simply shift rebalancing away from the cartel and towards higher cost producers.
"Once again the Saudis have delivered a hammer blow to fellow producers," said David Hufton, managing director of broker PVM. "It promises to be the final nail in the coffin for those shale producers and their lenders hanging on for a short-term price reprieve."
Crude markets are poised to become more volatile as Saudi Arabia flexes its muscles in the region and seeks to turn the screws on U.S. and Iranian oil production, Again Capital partner John Kilduff said Monday.I've long held the view that supply and demand factors have pressured oil prices down over the last year and if another Asian financial crisis erupts, you can be sure oil prices will be dragged down further.
Negotiations to freeze crude production at January levels fell apart over the weekend after Iran snubbed the gathering and top oil exporter Saudi Arabia refused to follow through with the deal without Tehran's participation.
Kilduff pinned the aggressive stand on Saudi Deputy Crown Prince Mohammed bin Salman. Ahead of the Doha meeting, the 30-year-old prince said Saudi Arabia could increase production by 1 million barrels per day.
"I think there's going to be one more beat down for prices that's really going to inflict the kind of pain the Saudis really want to [inflict] to the rest of the higher cost producers," Kilduff told CNBC's "Squawk Box."
OPEC's decision in 2014 to maintain high output levels rather than cut production to balance a market oversupplied by about 1.5 to 2 million bpd has been widely seen as a bid to pressure high-cost producers like U.S. shale oil drillers. U.S. production had surged through last year, contributing significantly to global oversupply.
The number of rigs in U.S. oil fields has fallen by nearly 80 percent from a peak of about 1,600 in October 2014 to roughly 350 last week. Oil production has fallen by about 600,000 bpd from a peak of nearly 9.7 million last year.
The Saudis are "not done with us yet. They are not done fixing our wagon yet," Kilduff said, referring to U.S. producers.
The Saudis are also targeting its regional rival Iran, which has ramped up oil exports after sanctions on the country were lifted, he said.
While a strike among oil workers in Kuwait is temporarily supporting oil prices, the downward pressures on crude futures will be "intense" as the Saudis compete for market share with other producers, he added.
The last key to the further pressure on oil prices could be slowdown in crude demand following the International Monetary Fund's downward revision to its world growth forecast last week, Kilduff said.
Last week, I went over why I was highly skeptical of claims that oil prices will double by year-end and agreed with traders who said fade the trade and brace for bad news out of Doha. The Russians might be frustrated but the Saudis couldn't care less and basically exposed why OPEC is a total farce.
Not surprisingly, immediately following the collapse of the Doha talks, crude prices plunged, commodity currencies like the Canadian loonie and Aussie dollar tanked while the yen strengthened and U.S. stock futures were down big. But that all reversed by Monday morning as crude gained a bit from its lows as traders focused on the labor strike in Kuwait which has slashed the Persian Gulf nation’s output by 60 percent.
At this writing on Monday morning, oil is down only 2%, the yen is down against the USD, which is good news for global risk assets and hedge fund managers can put off selling their summer homes as they reload on the yen carry trade to buy all sorts of risk assets, like small (XBI) and large (IBB) biotech shares.
Welcome to the crazy world of algorithmic trading where computers and algorithms rule the day on stocks, bonds, currencies and commodities. The swings you see trading these markets are incredible, especially following big events like an OPEC or Fed meeting.
So where is oil headed following the collapse of the Doha talks? That depends who you talk to. Gary Shilling has re-upped his bold forecast for oil to fall to $10 a barrel. Shilling is a well-known deflationista who has long held the view that deflation will be driving all commodity prices much lower.
Billionaire investor Wilbur Ross is among the players predicting oil will languish in the mid-$30s after the Doha summit ended without a deal. Ross, chairman and CEO of private equity firm WL Ross & Co, told CNBC's "Asia Squawk Box" on Monday that prices would range between $35 and the low $40s in the near future.
Other traders are more optimistic, focusing on technical action and the USD (see Bloomberg clip below). And others think that a Doha no-deal is actually great for oil prices:
Despite the collapse of talks, oil market watchers said the lack of a "Doha deal" would be better in the long term and would mean that a rebalancing process of supply and demand can continue to its natural conclusion.An interesting assessment but the fact remains that oil prices are determined by supply and demandand right now, the world is in a very precarious state because if another Asian financial crisis erupts, unleashing a global deflation tsunami, you will see oil prices head lower and stay low for a very long time.
"We can see it as the rational decision that there has been no decision (in Doha)," Michele Della Vigna, co-head of European Equity Research at Goldman Sachs, told CNBC on Monday.
"It has taken 18 months to start to rebalance the oil market with falling non-OPEC production in a variety of countries and demand showing signs of recovery which means we are getting there, we're getting to a new equilibrium."
"So why delay it with a self-defeating rally that would bring an oil price to above $40 a barrel too quickly and one that would incentivize producers to ramp back up production?" he asked.
This is why I have a hard time buying that oil will double by year-end but when you have a top commodity trader like Pierre Andurand arguing for a multi-year bull run for oil, you need to respect his views and listen closely to what he has to say. That's what makes these markets interesting and highly volatile.
Below, CNBC's Hadley Gamble reports on the weekend's Doha meeting of OPEC and non-OPEC oil producers and discusses Saudi Arabia.
And Natixis oil & gas analyst, Abhishek Deshpande, looks at what the collapsed Doha meeting will mean for investors and why oil could now fall to $30 to $35 per barrel.
Also, Miswin Mahesh, oil analyst at Barclays, explains how the failure of the Doha meeting to make an agreement to freeze oil production will hurt prices.
Fourth, Michele Della Vigna, co-head of European equity research at Goldman Sachs, asks why Saudi Arabia would delay pressure to re-balance oil supply and explains whether or not oil demand from China is going to pick up (interestingly, no discussion on how Tesla is going to impact oil prices longer term).
Lastly, Alan Knuckman of Bulls-Eye Options explains the technical story underpinning oil prices.