The anti-freeze in the oil market

Oil bulls suffered a nasty setback early this week. Before last weekend's meeting in Doha, aimed at freezing output, optimism over a deal propelled net long positions bets on continued oil price rises in the futures market to a record high. But there was no agreement after all: Saudi Arabia insisted it wouldn't freeze output if Iran didn't do the same which it wouldn't. Hedge funds rushed to unwind their bets, exacerbating the fall in prices. Brent crude slipped by 7% to $40 a barrel before bouncing back.

A freeze "was never an option for Tehran", says BreakingViews.com's Andy Critchlow. Having just emerged from international isolation, now that sanctions are being eased it wants to regain market share and boost production to pre-embargo levels. This is bad news for Iraq, Nigeria and Venezuela in particular, who are forfeiting around $465m in daily revenue at today's prices.

The "anti-freeze" may have dented sentiment, and exposed stark divisions in oil cartel Opec, says Helen Thomas in The Wall Street Journal, but it hasn't changed the fundamental story. Countries discussing a freeze, notably Iraq, Russia and Saudi Arabia, were already producing at record levels, so it would have made scant difference to the global glut. The market continues to undergo "slow self-repair", very gradually working off the surplus.

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For starters, non-Opec supply is falling. According to the International Energy Agency (IEA), 2016 will see 57 million barrels per day from this source, down from a forecast of 57.8 million six months ago. The key here is US shale production, which the Saudis have been trying to put out of business by flooding the market and making prices fall.

Shale has been more resilient than expected, but the number of drilling rigs has slumped and America's daily crude output has fallen below 9 million barrels per day for the first time in 18 months. It's fallen by 600,000 barrels in the past year. Output has also slipped in China and Latin America, while an industrial dispute has hit Kuwait this week.

On the demand side, says Liam Halligan in The Sunday Telegraph, the IEA thinks global demand should climb by 1.3% in 2016, with India close to eclipsing China as the main driver of demand. The upshot? The global surplus of around 1.5 million barrels could dwindle to 200,000 in the second half of the year, reckons the IEA.

One imponderable is how quickly shale could come back: as the FT notes, many producers have been so good at cutting costs they should be profitable if the price returns to $50 a barrel. But for now, oil has probably bottomed, and the slow recovery in prices is likely to endure.