Will OPEC’s Self-Imposed Limit Make a Difference?
Last week OPEC surprised many (us included) by making a decision in favor of limiting production. Member states have agreed to a cull of about 750,000 barrels per day (bpd), but the finer points of how that will be shared across the organization won’t be decided until OPEC’s November policy meeting.
But is that figure significant? Is it enough? Will it actually make any tangible difference to the global oil glut that we’ve seen in recent months? And will prices go up or down as a result?
The fact is that with the 750,000 bpd put to one side, OPEC is still producing a significant amount of oil. Figures for August show that output was around 33.53 million bpd. September pushed higher, with production coming in at 33.60 million bpd. So realistically a decline of around 750,000 bpd (or a production limit somewhere between 32.5 million and 33.0 million) isn’t hugely significant in the grand scale of things. In fact, that has even pushed the markets lower – quite the opposite of what you would expect, suggesting that it hasn’t been deemed significant enough.
But the decision has brought increased volatility into the oil markets. And that could present a whole other issue.
The breakeven point for US shale producers is pretty low at around $50 a barrel. If we see the prices rise and breach the $50 mark (which some analysts are predicting), then we could see additional US rigs coming online. As soon as it is profitable, they are going to start pumping not just to make some money but also to help increase market share. Related: Smoke And Mirrors: What Did OPEC Really Agree On?
Which could then leave us in the balance – less production from OPEC causes the price to rise; more rigs can now come online causing the glut to continue, pushing the price down again.
Meanwhile, it is significant to add that a feature of Q4 in past years has been a slide in oil prices. With that in mind, and the falls we’ve seen since the OPEC deal was announced, we could be set for the seasonal slump.
Technical analysts are looking at shorter term charts as we are expecting significant moves within the day’s trading. But in the medium term, we are expecting a resumption of the selling pressure.
Rich Clifford, Managing Director of Fractal SA thinks that “the risk is definitely on the long side of the trade. Our programs suggest we will be short for the majority of the 4th quarter”.
But Q4 aside, the OPEC deal has been significant in other ways. It has been the first time that the cartel has shown signs of solidarity since as far back as 2008. With OPEC now committed to working in the best interests of the organization we can see this as both a baby step toward a further limit, and as a sign of continued market domination.
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