A Rift Emerges in the Oil Industry as the Conversation Deepens in Singapore

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Here in Singapore, things influencing the oil world continue to make themselves clearer.

Recently, the oil market has been slammed with a tidal wave of volatility, and back a few weeks ago we had the largest drop in oil prices since 2015.

However, since I’ve been attending meetings here at OSEA 2018 in Singapore, one signal that the implosion in oil prices is nearing its end has surfaced.

In each of the last several downward cycles in the price of both daily pegged benchmarks (West Texas Intermediate in New York and Brent in London), a divergence has emerged prior to the recovery of pricking levels.

That divergence has begun over the past few trading sessions.

It amounts to a recovery in the market prices of crude oil and natural gas production companies while the underlying price of oil continues to move downward, and it has already become a topic of conversation here in Singapore.

From the floor, the issue even made its way into my plenary address before the OSEA 2018 conference.

And here’s why…

The Reversal of the Oil Price Decline

Singapore has long recognized that the costs of its energy are essentially determined by events elsewhere.

As a result, this vibrant Asian location for commerce and business has become quite sensitive to trends in stock market trading in centers like New York, London, Tokyo, and Shanghai.

This divergence is important because it indicates the end of a cycle.

True, we are likely to experience a few aftershocks, but the assumptions now circulating through the assemblage of heavy-hitting investors, corporate execs, and industrial leaders gathering here is this: The combination of politics, short running, and market dynamics is drawing to a close, which means that the very oversold oil sector is about to improve.

As on-screen commentators pointed out afterwards, it seems I basically called this reversal earlier in the week during an extensive interview on CNBC Asia.

As veteran readers of Oil & Energy Investor already recognize, the bulk of the oil price decline resulted from a political move in Washington to keep refined product prices low by guaranteeing others providing excess available crude.

Because as we all know, gasoline votes.

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As we move closer to Dec. 6 – and the next OPEC meeting in Vienna – prospects for a coordinated cut in global production are intensifying.

And the position widely held among those I am talking to here is one of frustration.

This is especially the case among representatives of primary producing countries.

The Foreign Oil Opinion

A Saudi colleague noted yesterday morning – in an unusual expression of dry humor (not usually considered a strong Saudi trait) – “The decision we will forward next week [at Vienna] will put OPEC, and thereby Saudi, interests first … bluster from Mr. Trump notwithstanding.”

This opinion was shared by other folks in our ad hoc “corner” conversation beside the conference room. These included reps from the United Arab Emirates and Kuwait – two other main OPEC players.

Thus far, public discussion about what is anticipated in Vienna a week from today has been subdued. A few pundits have suggested that Saudi Arabia is concerned about crossing President Donald Trump.

However, that has been roundly rejected among the people I am talking to here, and those among my contacts elsewhere in the oil community.

Almost to a person, they tell me that this time around they will be advancing their own national interests ahead of the political rhetoric inside the Beltway.

The back channels are suggesting a cut of about 1.2 million barrels a day.

However, last time there was a cut approved by OPEC and primary non-cartel producer Russia, additional volume left the market as well.

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I would suggest at this point the ultimate cut will be closer to 1.4 million barrels.

A New Wrinkle Appears in the Oil Conversation

In advance of this development, a more constricted market environment is emerging that will, in turn, prompt a further exiting from short positions (devices designed to profit from the decline in an underlying commodity or equity) and a rethinking on the supply side (where overproduction has led to a narrowing of profit margins among operating companies in the United States).

In the context of a larger energy picture, over the past three days I have found a wide consensus among investment leaders here – we all agree that the next three decades will witness some changes in the energy mix.

But despite some impressive increases in renewables and other non-traditional energies, crude oil, natural gas, and coal will remain the dominant global energy sources through 2035 and beyond, which means the investment picture will remain broad.

Nonetheless, one interesting new wrinkle has appeared.

It just happens to be an element that I have emphasized in the energy balance view developing over the past several years.

In addition to having more distinct energy sources, those sources must also provide greater parallel and interchangeable applications to provide a necessary improvement in efficiency (and thereby both availability and cost).

One of the more intriguing Singapore conversations underway this week has been about providing finance to encourage the interconnected nature of energy networks. What I always find interesting is the fluidity of moves in expanding places like Asia.

What is considered a major change elsewhere is introduced more seamlessly here.

And, as it happens, I had an interesting visit today with a fellow who may hold the key.

We will see where it leads.

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