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Oil Production Cap Considered Unlikely by Analysts

The world’s oil cartel will soon meet to discuss capping production in a bid to boost prices, but many market watchers expect it will be all talk, no action.

Analysts left their oil price forecasts largely unchanged amid a continuing glut and doubts that major producers will clinch a deal to tackle it. Officials from the Organization of the Petroleum Exporting Countries are convening later this month to discuss possible curbs on their output, but stark differences between the members remain a major obstacle to a deal.

A survey of 12 investment banks by The Wall Street Journal sees Brent crude, the international oil-price gauge, averaging $57 a barrel next year, up by less than a dollar from last month’s survey. The banks expect West Texas Intermediate, the U.S. oil gauge, to average $55 a barrel next year, unchanged from the previous survey.

Oil firm executives gathered in Singapore this week made rosy projections that the market was due for rebalancing, but the analysts’ forecasts reveal an enduring skepticism that things will get much better soon.

Oil prices have struggled to rise above $50 a barrel in recent months as big oil producers pump crude at a fast pace and stockpiles around the globe continue to swell. Meanwhile, analysts say that an increase in U.S. drilling activity could point to an end of the decline in shale production that many hoped would help alleviate the oversupply in the market.

“I don’t see a fundamental justification for prices above $50” a barrel, said Hamza Khan, head of commodity strategy at ING Bank, who forecasts that prices will hover around $40 this year and next.

Many market watchers see the OPEC meeting, which will take place on the sidelines of an energy conference in Algiers beginning Sept. 26, as a repeat of the failed output freeze talks in Doha in April.

“Every time before an OPEC meeting they say a freeze is a good idea and every time they come out empty-handed,” Mr. Khan said. “It’s pretty clear that producers are focused on pumping as much as they could.”

Prices rallied briefly earlier this week when Saudi Arabia and Russia signed an oil-cooperation agreement but the market quickly lost ground as the two crude heavyweights stopped short of pledging production limits. Russia’s oil output is hovering near a post-Soviet high while Saudi Arabia’s reached a record high in July.

In early morning trade Thursday, Brent was trading up 1.6% at $48.74 a barrel, while WTI was up 1.9% at $46.39 a barrel.

The main obstacle to a freeze deal continues to be Iran, which insists on raising its production to reclaim lost market share after years of international sanctions ended this January. Tehran has said that before considering cooperation, its production had to rise to between 4 million and 4.2 million barrels a day. It currently produces around 3.6 million barrels a day.

Other OPEC members are also unlikely to voluntarily limit their output, analysts say, with Nigeria and Libya producing less due to recent conflicts. J.P. Morgan last week lowered the chances of an agreement to cap production to 10%, down from an earlier estimate of 35%.

“The prospects of any agreement on production caps being reached that will genuinely help the oil market could not be slighter,” analysts at Commerzbank said in a report.

There are other headaches for oil bulls, analysts say.

With oil prices having risen from the decade-lows they hit in the beginning of the year, many shale producers in the U.S. have recently ramped up drilling. The number of rigs drilling for oil in the U.S. has climbed in nine of the past 10 weeks, according to oil-field services company Baker Hughes Inc. This could mean U.S. production, which is down from last year’s highs, is close to bottoming out, analysts say.

Given the headwinds for oil, the banks in the survey see oil prices staying below $50 a barrel until the end of this year and below to $60 a barrel for the whole of next year. Last summer, many of the same banks were predicting oil prices would rise to more than $70 a barrel this year.
Source: Wall Street Journal

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