OPEC Calls for the Oil World to Turn Down the Faucet

During the last week of September we started hearing reports that OPEC had “agreed to agree” so the speak. The Organization of Petroleum Exporting Countries preliminarily made a pact to put a ceiling on oil production among its members once the group met again in late November. Well, late November has come and gone (the group gathered November 30th in Vienna) and OPEC made good on its promise (which it made with itself, essentially … more of a spit-handshake than a promise really). Now, almost two weeks have passed and we’ve been able to look at the impact of the deal–so let’s talk about that first.

In short, the price of oil went up. It went up immediately the day OPEC announced it would cut oil production in all but one of its member countries (Iran was the exception). On December 1st, Reuters reported, “U.S. crude ended the session at $51.06, up $1.62 or 3.3 percent on the day. Its session high was $51.80 a barrel, 13 cents below its 2016 high” (1). Furthermore, “Benchmark Brent futures settled 4.1 percent or $2.10 higher at $53.94. Earlier in the session, prices jumped as much as 5.2 percent to $54.53 a barrel, the highest level since July 27, 2015” (2).

Not bad, especially when you consider that prices didn’t just jump for the day and stumble to their pre-announcement numbers days later. Now, at the writing of this article (12 days after the announcement), prices closed at $52.71/bbl (WTI) and $55.60/bbl (Brent) (3).

Also not bad, but are these prices a sign of continued uptick or, at least firm mid-$50 prices? Let’s look at some considerations.

First, as I touched on in a previous article found here, there’s no guarantee that OPEC member countries will keep their word to reduce production. IF they stay true to their pledge, and that’s a big capital-lettered IF, “Record inventories accumulated since 2014 will dwindle at a rate of about 760,000 barrels a day in the first half of next year” (4). That’s a serious dent in the world’s oil supply glut.

Next, these “caps” aren’t scheduled to begin until January. In the meantime, these countries are free to open the faucets full-blast, which could dramatically add to the world’s oil supply glut.

Next, OPEC also called for non-OPEC members to reduce their production for the greater good of world oil prices. This marks the first time in 15 years OPEC has made a coordinated effort with Russia (a non-member). Will Russia comply? Will other countries around the world, including Canada and the U.S.? That remains to be heard and then actually seen.

The OPEC agreement, which is the first concerning a cut in oil production in 8 years, came to many as a surprise, but it suggests OPEC is serious about reinvigorating oil prices by crimping supply.

Lots to watch here; stay tuned.

1, 2 Resource

3 Resource

4 Resource