Market uncertainty persists over the likelihood of OPEC members negotiating a deal, leading many to question whether oil prices will plummet once more to $27.
The oil industry has been struggling since 2014, with an oversupply as a result of mass oil production causing prices to fall dramatically from previous rates of $105 a barrel. The market has been increasingly over saturated as a result of production from both by nations within the organisation and non-OPEC members. Attempts to destroy the US shale gas industry, coupled with the lifting of sanctions against Iran which has led to a significant strain on prices.
Consequently, after September’s announcement of OPEC finally reaching a prospective deal in regards to oil output, oil prices initially rebounded and the stock market similarly rose as a result. One month on however, and the proposed OPEC deal has already received a blow after Iraq backed out of negotiations, causing further doubts over the likelihood of an agreement materialising.
Thus far, OPEC members remain divided on their position regarding output adjustments. Disagreements persist over which members should enjoy exemptions from output reductions to the stipulated range of 32.5-33 million barrels per day (bpd).
Whilst Saudi Arabia initially indicated that they would not accept any restrictions on production, lower oil prices have continued to affect Saudi Arabia’s economy causing a recent reluctant assessment of their position. As a result of continued financial strain over oil prices, Saudi Arabia have had to raise funds in order to recover those losses, raising $17.5 billion from bonds. Moreover, Iran remain equally disinclined to halt production, having only recently benefiting from the lifting of production sanctions previously imposed by the United Nations.
Additionally, whilst Russia have reaffirmed their commitment to the deal Putin remains unyielding regarding oil output, making an OPEC agreement more and more unlikely. Whilst Russia is not an official member of the cartel, representatives are still present during any negotiations and thus progress is hinged upon Russian compliance. Ultimately however, Russia’s struggling economy is particularly reliant upon oil and consequently they prefer an agreement on freezing prices as opposed to an outright reduction of production.
Moreover, OPEC is continually pressured by competition from other non-members, such as from Brazil and in particular US shale gas production. The cartel has continually attempted to constrain US growth within the industry and indeed US crude production has decreased by about 10 percent from a peak of 9.6m b/d.
Nevertheless, whilst all oil producing nations have felt the effects of oil price plunges, the fact remains that Opec’s total output is more than three times higher than that of the US, and thus any price alterations have a greater implication for OPEC member economies.
Despite markets anticipating that ultimately the OPEC deal will not be fulfilled, it remains unlikely however that oil prices will indeed return to $27 due to the reality of high storage costs.
“Doubts linger about OPEC’s ability or willingness to implement any production cuts,” commented analysts for Cenkos Natural Resources.
“The market has been wary of reading too much into the rhetoric ahead of the next meeting scheduled for the end of November.”
The OPEC negotiations are scheduled to take place on November 30th in Vienna.