Oil has taken a huge hit this week, with prices dropping as low as $50/bbl. This is despite OPEC’s efforts and plans to get the price of oil back up to $70/bbl by agreeing to cut production from 1st January 2017 for six months. It is now becoming apparent that this is not feasible in the time scales agreed. Plus the fact that US oil rigs are on the rise, crude stockpiles are increasing, and more and more shale oil is being drilled under Trumps Presidency. America’s production activity is totally counteracting everything OPEC have attempted to put into place. And now oils is trading at 4 month lows.
OPEC have been continually announcing excellent compliance rates with the agreed cuts made in November 2016. Most notably Saudi Arabia had initially taken the lion’s share of cuts anyway, but have been keeping to the designated cuts brilliantly. It was agreed last year that as part of the deal, some non-OPEC countries would also take part in cutting oil production in an effort to increase the price of the non-renewable commodity. Russia, among other countries not part of OPEC had agreed to take part in cuts, and most also kept a good compliance rate. However Russia have been slow to make the necessary cuts, and have managed to implement only half of their targeted cuts so far. Many have suggested that the cuts initially agreed by OPEC wouldn’t suffice to bring the price of oil up, or to make and impact on the overall global oversupply of oil.
Meanwhile, in America, a new oil field the size of a large Saudi Arabian oil field was founded in Alaska, where oil drilling is scheduled to begin. Furthermore there are reports emerging that additional sizeable oil wells and fields are being discovered in South America, further increasing the chance of production.
Over the last few days, many have speculated as to whether OPEC will continue to cut production, thereby extending the deal for a further six months. However this has not yet been agreed. Many have suggested that six months was never enough, which is why in November oil prices didn’t breach $60/bbl mark.
Numerous contradicting rumours regarding Russia’s input in complying with prolonged cuts have surfaced. Russia have stated that they would keep an open mind, however as they have had a low compliance with the agreed cuts so far. It is doubtful that OPEC’s cuts can rival US shale output and crude stockpiles. Saudi Arabia’s oil minister has also shared doubts about other OPEC and the 11 non-OPEC countries compliance with cuts. As the reductions have been minimal in comparison to Saudi’s cuts – which have not been kept to – they are uncertain that prolonging the current agreement will do much in the bigger picture. OPEC are due to meet in May to discuss the opportunity to extend the current agreement, however it si ver unclear as to whether this will go ahead.
Sources: Reuters, Financial Times, Npower (RWE), EDF Energy, Gazprom Energy, SSE, Engie