OPEC well on their way to rebalancing the oil markets

Oil markets have started the year on a volatile manner, as the first three weeks of the year has seen Brent Crude prices increase from $64/bbl to over $70/bbl. At the time of writing, Brent has eased off from 3 years highs to $68.88/bbl. To put into perspective, Brent Crude is trading 24% higher than in January 2017.

OPEC’s efforts to reduce the oil overhang in the market has gone well enough, and the cartel are currently on track to rebalancing the oil surplus. However there are some concerns over US Shale production activity. We have seen previously that US oil producers tend to take advantage of an increased oil price, and increase production drastically. What follows is generally a sharp decline in oil price. While Brent is trading at almost $70/bbl, US drillers added 10 new oil rigs to fields.

Surging shale production is poised to push U.S. oil output to more than 10 million barrels per day.
— Reuters

Not only is US production a risk to OPEC’s aim of increasing oil prices, but Russia also poses a slight threat. Russia joined OPEC’s deal to curb oil production until the end of 2018, however implemented a clause last November to review the achievements in June 2018, with the potential to end the deal if the market rebalances. Many market analysts are of the view that an abrupt end to the current deal could jeopardise gains seen in the oil markets recently.

Many other members of OPEC have echoed this view, and so a potential end to the deal in June is on the cards. However, while this is not yet decided, and the deal is still set to technically end at the end of the year, oil may well hold onto recent gains.

 

 

*Sources: Bloomberg, Reuters, Business Insider, Energy Live News