Oil market needs a will of iron - October 23, 2016

Oil market needs a will of iron

The fate of the oil market is not decided yet, warns Innovative Securities’ new analyses which was made after OPEC (and Russia) announced it would cap daily oil production between 32.5-33 million barrels. The freeze is planned from November and would be a great step back from the 33.24 million barrels of today. But these decisions are not definitive yet.

We should not forget that it is hard to reach an agreement inside (and outside) the OPEC, and there were several instances when announcements remained just that, announcements. What makes the situation more interesting is that days later Russian president joined the emerging pact. One thing is for sure: the freeze of production came unexpected as the price of WTI crude jumped from $44 to $51 in two weeks.

There are signs for a protracted debate: in the last years Saudi-Arabia and (the non-OPEC member) Russia revved up its oil production to keep or grow its market share. They produced 10.5-11 million barrels each. In the meanwhile, Iran just returned to the global market this year and plans to reach 4 million barrels per day, instead of 3.2 million. Nigeria and Libya also tries to raise production. In a situation like this, it is hard to see who would give up its production for the benefit of others.

With a compromise and a price around $60, the balance between supply and demand would be easier to reach and this would be good for most oil producing countries and would give a boost to the global economy and inflation. Namely, even the low oil prices could not get a boost for consumer spending while oil companies have postponed investments totalling up to $500 billion. A higher oil price (above $50) might also be a reason for the US to restart shale oil production which would raise supply.

OPEC, however, did not cut back its production in 8 years so some are sceptic this time too. If they do reach an agreement that would easily raise the prices to $60-70. On the other hand, if OPEC fails again, after a fast disillusion prices would fall under $40 and the general optimism would end for a while.

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