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Did OPEC Shoot Itself In The Foot?

OPEC

In roughly four weeks’ time, OPEC and Russia will meet in Vienna to assess how well their agreement to cut oil production has performed. They’ll have a hard time getting over the fact that since they started cutting production, stockpiles have grown.

This week it led to a rough ride for prices, with headlines screaming ‘Oil has had its worst day since March!’ WTI closed on Wednesday at $50.26 per barrel, after the U.S. Energy Information Administration reported that stocks of crude oil had fallen by 1 m barrels – instead of the 1.5 m that had been anticipated.

It wasn’t what the market wanted to hear after the previous week when the International Energy Agency had revealed that inventories in industrialised countries remained marginally above the five-year average.

How did this happen? Well, when OPEC agreed in principle in September 2016 to reduce output, nothing was actually going to come into force until January 1st 2017. Naturally, members went hell for leather boosting production – in November the output hit a record high in recent times of 34.19m bpd. Just one month prior to that the output had been 33.82m bpd. Citigroup summed it up perfectly, saying OPEC had been ‘hoisted by its own petard’.

Since January 1st, it has done rather well at ensuring the group stuck to the deal. Unfortunately for OPEC it has also been hostage to fortune. Although compliance saw the price recover from the pits – those gains emboldened U.S. shale producers. Data from Baker Hughes suggests output is rebounding in the U.S. with explorers adding rigs for over three months. Related: Will Banks Allow Another Slew Of Oil Bankruptcies?

Unsurprisingly Patrick Pouyanné the chief executive of the French oil and gas company Total predicts a slide in oil prices by the end of the year – and last week wasn’t shy about putting the blame firmly on the shale drillers. “The price may fall again. U.S. producers who have recovered quickly, will regenerate an influx of supply by the end of the year and this could have a negative impact on the markets.”

It would be wrong not to promote the excellent quote obtained by worldoil.com from Eugen Weinberg, head of commodities research at Commerzbank who said: “OPEC is like a magician waving his hands and trying to pull the rabbit out the hat, but still the rabbit isn’t there. They’ve done all they can with the production cuts and the effect is close to non-existent.”

However carry on they likely will. According to Bloomberg, Khalid Al-Falih told guests at a conference in Abu Dhabi that "There is an initial agreement that we might be obligated to extend to get to our target.” It’s clear not everyone is fully on board, as he later told reporters that “Consensus is building but it is not done yet. We’re still in consultations.”

Related: Despite Fears, China Remains A Bullish Force For Oil

It’s interesting how few public calls have been made for U.S. producers to show an understanding of the market. Mohammed Barkindo, the secretary-general of OPEC said at that conference that the measures taken by OPEC and non-OPEC had put the oil market “on the path to recovery”. He added “Our collective action will continue to prove effective.”

But as Einstein put it: “The definition of insanity is doing the same thing over and over again, but expecting different results.” Without buy-in from the U.S., it’s hard to see how that can work out.

By Precise Consultants

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  • Naomi on April 23 2017 said:
    Primitives always breed beyond carrying capacity of their resources. OPEC need over $100/bbl to feed their breeders. With prices at $50/bbl a population cull is coming. Putin made a good effort by cutting off the Russian food supply. Saudis help by funding genocide in ISIS territory. Venezuela starvation is heroic.
  • Karthik Srinivasan on April 23 2017 said:
    Production cuts, without a corresponding acceleration in demand, merely create excess spare capacity. At some point, one member of OPEC (and that's all it takes) will say it doesn't make sense to continue with these agreements and it's best to maximize current revenues by increasing volume. The incentive to cheat will become too great to ensure compliance.

    Oil also faces a big problem with the wave of electric vehicles hitting the market by 2020. I'm not going to argue the net benefit to society from these types of cars, but they will hurt demand growth.
  • bill on April 23 2017 said:
    the us is dumping oil on to the market to break russia and other powers, and until they are de stabilized, oil is going to flood the market, for decades maybe?
  • Edmund Paulus on April 24 2017 said:
    How does one expect the US to limit their oil production? It's more-or-less a free market that is quite unconcentrated. Even if exports are halted it would eventually mean their imports would be reduced as they are still a net importer.
  • karan on April 24 2017 said:
    Gulf countries have lot of money , but they r creating excuses and fake economic crises as they dont want to take any REFUGEES and they have taken none , they have lot of money for hosting FIFA world cup
  • Dewey Kendrick on April 30 2017 said:
    Now that OPEC is unable to fully control the fluctuations of the market as in years past, they are implementing production cuts. Sounds like an unfeasible, desperational act that will be uphended by a free market. OPEC is losing a lot more than gained -as stated by Karthik- denying the inevitable, and giving new life to American and international companies once again. Supply and demand can only be relied on by uncertainty of events,
    not planned actions. You can't make money on certainty, too many people will beat you to it.

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