When nothing surprises the markets anymore
- Written by Laurentiu Rosoiu
The failure of the world’s largest oil producers in Doha to reach an agreement on freezing the level of production has given the markets a negative impulse! Of a very small scale however, as it lasted only a few hours. Thus, in the maximum point of tensions regarding the outcome of the meeting, i.e. the trading session of April 18, the WTI oil reached the level of USD 39.78 per barrel, while the Brent oil peaked to USD 42.91 per barrel, thus marking corrections of 5% and 4% respectively against the values recorded at the closing session a week ago (Monday, April 12, when the WTI had a benchmark of USD 42.17 per barrel and Brent oil of USD 44.69 per barrel).
This apparently consistent weekly drop in percentage terms must be seen in conjunction with the one recorded on April 18 - when the prices of the two types of oil prices have registered decreases of only 1%; furthermore, it must be considered in conjunction with the fact that as of the next day, oil prices bounced back on the increase, so that by the end of the week when the meeting took place (i.e. until Friday, April 22), prices of both types of oil were above the levels from which the downward trend had begun.
Put together, these developments show that the failure of the meeting in Doha (and the meeting by itself) was actually a ‘non-event’ or an ‘expected failure’ for the large players on the oil market - players who seem not to actually have any reason to exit the long positions (long is called the financial position of an investor who relies on the increasing of the reference asset price).
And if ‘the market is always right’ – as a saying goes among brokers and sophisticated investors... the scenario of a continuous oil price increase (or at least its stabilization) is, paradoxically, more topical than ever lately.
Thus, instead of freezing production (to lead to higher sales pressure and to higher prices) - as the meeting in Doha had envisaged, the market has received very clear signals showing that more oil producers are more decided than ever to maintain the market shares. The firm positions of Iran and Saudi Arabia on the topic are relevant enough; it the tensions felt by other states in a delicate economic and financial situation are taken into account, such as Russia and/or Venezuela, the prospect of a market characterized by overproduction is clearer than ever.
However - and here comes the paradox, this evidence did not make the buyers to massively withdraw from the market nor the sellers to be more aggressive!
It is true that, analyzed on the short term, the explanation of the oil prices development can be related to the impact of conjectural events - such as the Kuwaiti workers strike in the oil and gas sector; a strike that, during the three days (which overlapped the meeting in Doha), led to halving the oil production of this OPEC member. The conflict was settled quickly however, as we speak of a country where little happens without the ruling class’ agreement (Kuwait is a monarchy where the royal family controls the social and political life), it is unlikely that any similar events happen otherwise than with agreement.
Therefore, in such a reality, the Doha meeting’s failure to influence the oil prices comes as a confirmation that the brokers and investors long-term perspective on the market has changed from ‘bearish’ to one rather ‘bullish’ (terms used in specialized language expressing an expectation of decrease, respectively increase of an asset price). And as setting production limits - as meeting in Doha had planned, had virtually no contribution to these changes, the explanation can only be that in the depths of the market - as sum of all impulses, news, information, analyses and existing sentiments, has formed a strong first level of support on the downward trend that has lasted for about a year and a half.
Therefore the market seems to have found a natural balance, despite a context which shows that there is likelihood that the period of overproduction would be longer than perhaps desirable. It remains to be seen whether ‘the market is always right’ or is occasionally wrong.