Are OPEC cuts going to be in vain?

January 11, 2017

As OPEC and its biggest partner Russia have agreed to curtail Oil output prices, this offers the strongest catalyst of recovery since the start of the fight for market share back in 2014. Despite the initial market “hurrah” which helped the prices to get over the $50 mark, a further procrastination followed the first statements of the output cuts. For example, last week Kuwait and Saudi Arabia reported about their first cuts. On Tuesday, Russias cut production by first 100K b/day while Iraqi Oil Minister Jabbar Al-Luaibi reported about 160K b/day slashed from country’s production, as committed to recent OPEC’s deal. The abnormally cold temperatures seen in Russia, Poland and other regions generally tend to increase the need for heating and hence consumption of Gas and Oil. Still, this had a meagre impact, as the behaviour of prices shows that there needs to be a bigger push on the supply side.

As seen from the chart, from the start of 2017 prices staged two attempts to set a bullish market but both failed. The first time, due to gloomy EIA report and the second time due to the signs that OPEC strategy showed serious weakness – a pressure from rivals, which didn’t participate in the deal.

The prospects for a rebalance on the market are likely to be hindered mainly due to the revival of shale production in the US. Fifty dollars per barrel is generally considered a breakeven level for most US producers and higher prices will imminently stir the pot. Thus, several active Oil rigs in the US reached a 529 level last week, according to Baker Hughes report, while EIA stunned investors with a 7M decrease in supplies vs. the projected decline of 2.1M. Iran and Libya also took the advantage of the decrease in the global supplies and ramped up the production.

It would be too naive to think that holding Oil prices too low would help OPEC squeeze out the US rivals in the long term, as their renewal with price recovery is just a matter of time. OPEC has an intricate problem whether to move toward the cooperation or get offset by other regions such as North America and Iran and Libya.

Our short term forecast for WTI shows an upsurge to 53.50-54.00 from current levels in case the Wednesday update from EIA shows positive deviation from the forecast. The market looks slightly bullish with main market participants currently are ready to kerb the oversupply.

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