Oil prices fell during Thursday’s market session. The drop coincided with OPEC’s meeting in Vienna, where the announcement was made that production cuts would be extended at current levels for an additional nine months. Market analysts speculate this drop was caused by the market opinion the extension of the cuts at their current level might not have the desired effect of sufficiently reducing global oil stocks.
In a meeting at the OPEC headquarters in Vienna Austria on Thursday, OPEC decided to extend production at their current rate of 1.2 million bpd for an additional 9 months. OPEC will almost certainly be joined in these production cuts by a dozen other non-OPEC oil producing nations. The group of non-OPEC reducing nations is led by Russia, which will continue its production cut that began in December when the previous round of OPEC cuts which began. The non-OPEC share of the production cuts is expected to be around 600,000 bpd.
Much has been made in the energy markets lately of the intentions of OPEC, whether the extension of the production cuts will have the desired effect upon oil stocks, and the markets reaction. What hasn’t been discussed however, is that if the production cuts were effective one man could decide to restore oil stock to record highs almost instantaneously. That man is of course, the most powerful man in the world.
It is an open secret that the math on the proposed extension of the joint OPEC/non-OPEC production cuts isn’t quite enough to eat away the supply glut currently on the market. Russia and Saudi Arabia have agreed to a combined cut of 1.8 million bpd but the glut is huge. A strong overhang in production combined with weak seasonal consumption and the ramp up in production of other oil producing nations has limited the effect of the cuts thus far.
With the cartel’s meeting in Vienna drawing closer by the day the question on everyone’s mind is: “What will OPEC do?” After the Saudi agreement with Russia, it is clear production cuts will be extended and OPEC has only three choices: decrease, maintain, or increase output.
The OPEC oil market report for the month of May acknowledged a fact which astute investors in the oil sector have long known to be true, namely the cartel is losing power. A surge in U.S. output which is dominated by oil shale led to OPEC raising estimates for non-OPEC growth by 370,000 barrels per day (bpd) from April’s estimates. This represented a 64% rise from April’s projections and growth of 950,000 bpd from the previous year. This outlook marks a dramatic departure from the cartel’s estimates for growth in the U.S. just 6 months ago when production cuts were first announced last November.
This is the final segment in a three part series discussing the recent past and future of oil prices and the reasons why prices are where they are. Currently there is a glut in oil inventories worldwide. There are a number of factors contributing to this continuing situation as I have detailed in there previous two segments of this series but in the end it can all be summed up into one simple statement: All parties whether they are individuals, corporations, or nations tend to do what is in their own best interest.
This is the second part of a three part series discussing the recent past and future of oil prices and the reasons why prices are where they are. Many intelligent people who make their living analyzing oil markets have pointed to OPEC and its ability to enact large scale production cuts as central controlling oil prices. While this has yet to occur as the production cuts enter their fifth month true believers continue to chant the mantra “just give it time”.
This is the first of a three part series discussing the recent past and future of oil prices and the reasons why prices are where they are. April was an interesting time for the crude oil market. From late March until the latter half of April oil prices were above $50 a barrel and oil bulls became excited by the idea that a supply cut led by OPEC and Saudi Arabia would soon tighten balances and lead to increased prices. This has not come to pass and here is why I am doubtful that change in the near future.
The agreement between OPEC and non-OPEC countries around the world to limit supplies has been called into review by a joint committee of ministers from the oil producers. Prior statements from these countries has hinted at the possibility of an extension, always citing the high levels of conformity between the members of the pact. Previously,… Keep reading →
