OPEC does its part, but is it enough? - February 19, 2017

OPEC does its part, but is it enough?

OPEC countries seem to live up to their promise as they held back their oil production almost as they planned, according to the International Energy Agency (IEA) and the OPEC itself. This started to raise prices, but there are still some questions to be answered to see the future of oil.

We wrote how oil producing countries need a will of iron to hold back their production as they planned, but now it seems they have that kind of strength. As they agreed upon it in last November, they started to hold back their production with significant amounts. As Bloomberg reported, “OPEC implemented 90 percent of its pledged output cuts”. It was quite unsure how OPEC parties would keep themselves to the agreement but from the report it turns out that “a record level of initial compliance” can be seen among them.

The biggest producer, Saudi Arabia and some other countries reduced their production even more as they had planned. Libya and Nigeria on the other hand raised their production against the agreement, but to be fair, they had been exempted from it beforehand.

There are 11 non-OPEC members in the agreement as well. Just to name some big players: Russia and Kazakhstan are among them and they seem to live up to their promises. They already cut back their production with 269 thousand barrels, almost half of the originally planned amount. Russia, however, plans to reach its cutback gradually so their production will probably fall even more in the future.

These actions already had some effects on the prices. When the first news of talks came to light prices went up from $44 to $51 in two weeks but slowly fell back. When the agreement was struck, prices rose instantly and stopped around $54-56. Now they are stuck at that level, but it’s still a huge rise compared to the previous levels.

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Prices could go higher since there is a growing demand for oil, at least according to the IEA, but the situation is not that simple. As OPEC countries are holding back their production, others are revving it up. Brazil, Canada and the US are producing more oil in 2017 than before. What’s more, the US has giant reserves of shale oil, and as technology advances, it’s cheaper to produce every day. At the moment, production is halted, but with a crude price above $50 shale production may be restarted any day and that (with the support of countries not involved in the OPEC deal) would bring balance to the oil market. What’s more, Donald Trump is well-known for being pro-fossil fuel, so he will probably do everything he can to raise the States’ production.

This may result in a balance around $50-60 and that would still be preferable for oil companies and consumers too.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving high returns on their investments.