Achieving a balance in the oil markets is proving to be a challenge for the Organization of the Petroleum Exporting Countries and its allies, and they face their stiffest test yet when they meet in Vienna next week.
OPEC’s official meeting will be held on Dec. 6, and members of the group, along with some nonmembers, may agree on a production cut as the market reels from a more than 30% drop in prices over less than two months.
“Markets will be watching how OPEC will grapple with multiple threats to their efforts to keep prices buoyant,” says Peter Kiernan, lead energy analyst at forecasting and advisory services provider Economist Intelligence Unit. Those include “expectations of slower oil demand growth next year, robust U.S. supply…and vocal pressure from [U.S. President] Donald Trump to keep prices lower.”
Oil futures climbed to their highest settlement in nearly four years in early October, only to drop to a more than one-year low in late November. For global benchmark Brent crude LCOG9, -1.40% that was a drop from a peak settlement of $86.29 on Oct. 3 to $58.76 on Nov. 28.
“So far, this oil rout has been driven by the supply side, so…the market will still need to see a substantial cut to OPEC’s target output next week for any sort of bottom to form in the futures market,” says Tyler Richey, co-editor of the Sevens Report, which provides daily markets analysis.
OPEC is expected to cut production in an effort to stave off a global glut in supplies. The risk of an oversupply emerged after the group and its allies, including Russia, agreed in June to raise production, in part due to an expected loss of oil from U.S. sanctions on Iran’s energy sector. Before that June increase, oil producers had been cutting back production for more than a year to get rid of an oversupply.
Global production has been increasing and stands at record levels in Saudi Arabia and the U.S., while demand has been slowing, says Tariq Zahir, managing member of investment-advisory firm Tyche Capital Advisors.
The biggest factor in the oil price slump was Trump’s pushing Saudi Arabia to increase production and then surprising the Saudis by issuing exemptions to several nations allowing them to continue doing business with Iran, says Zahir.
As Iran sanctions took full effect on Nov. 5, Trump granted eight countries, including China, temporary waivers to continue buying Iranian oil, effectively erasing that threat to global supplies.
Scott Gecas, chief market strategist at Long Leaf Trading Group, believes that Trump’s support of Saudi Arabia in regard to the murder of journalist Jamal Khashoggi is a “ploy to influence the Saudis” and keep them from cutting production. At the same time, however, OPEC isn’t happy with prices testing $50, he says. U.S. benchmark West Texas Intermediate oil CLF9, -1.42% settled at $50.93 on Friday.
That all translates into a dilemma for Saudi Arabia and its fellow OPEC members.
“If OPEC cuts output to support prices like they did beginning in 2017, they will indirectly be providing the financing for new production to [U.S.] oil producers,” says Richey. “Contrarily, if they open the spigots again like they did in late 2014, energy prices will get crushed.”
That said, many analysts believe that OPEC and its partners would need to cut output by one million barrels a day or more to support prices.
‘If OPEC is serious about putting a stop to the slide in prices, it will need to act…’
The cut would have to be “at least one million [barrels a day] to have some effect next year,” says Kiernan. “The level decided on would need to be seen in the light of the increase in output that Saudi Arabia and Russia implemented in June, as a smaller cutback would just be reversing that most recent increase.” Saudi Arabia’s energy minister in June had pegged the increase at one million barrels a day.
“If OPEC is serious about putting a stop to the slide in prices, it will need to act, and, at the very least, it will try to erase the increase in supply seen since the middle of the year,” he says. On the other hand, if the group fails to act, then “bearish sentiment…will be locked in at least for the first half of next year.”
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