Further supply cuts key to oil price

1 November, 2017

Brent oil is now sitting comfortably above the $60, making its highest level in more than 2 years on the back of a deal between Russia and Saudi Arabia to extend production cuts past March next year.

Up until now, the deal to reduce output between Opec members has run smoothly with most countries sticking to their agreed output but come March, things could change and not all may be on board for an extension of cuts.

Countries such as Libya and Nigeria are looking like the countries that may opt out of the next deal as they feel they need to make up for lost time due to supply disruptions for various reasons

It will become clear to the market over the next month or so who is in or who is out and depending on how many countries refrain from extending production cuts, the oil price could be in for a sharp reversal.

Another thing to watch are drillers from the USA who are currently ramping up production to take advantage of higher prices and if history is anything to go by, this will eventually lead to an oversupply of oil in the market which will also pressure the price.

US shale producers claim they were still profitable when oil was around $40 a barrel so the margin for a pullback is quite significant

“We could rapidly go from a predicted deficit of around 260,000 barrels to a surplus of close to 1.5 million barrels. Prices would undoubtedly collapse,” said Matt Stanley, a fuel broker at Freight Investor Services.


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