Opec cuts won't work

16 May, 2017

The oil price racked up its fourth straight day of gains today after Saudi Arabia and Russia said a deal to cut production should continue until March next year.

After reaching a low of $46.50 just over a week ago, Brent crude oil has jumped more than 13 percent and is now trading around $51.80.

In a joint statement today from China , ministers from Saudi Arabia and Russia agreed to further oil production cuts until next year, which sent the oil price significantly higher but some say the move won’t be enough to support the oil price for a sustained period and more needs to be done,

"Opec and Russia recognize that in order to get the market back on their side they will need 'shock and awe' tactics where they need to go above and beyond a simple extension of the deal. The market will also be looking at export cuts and not just production cuts, which is what is required to rebalance the market."noted Virendra Chauhan, an analyst at Energy Aspects.

As in Previous deals, The US has refused to join any production cuts with OPEC and Non OPEC members and in fact increased production to take advantage of the higher prices.

The number of oil rigs in the US is now expected to increase which may be a barrier to any significant gains.

There are also problems of loyalty with some of the OPEC members, who on the surface agree to cut production, but in reality keep the oil pumping,

“This is not going to cut the mustard, because the biggest problem will most likely emerge within the cartel. Libya and Nigeria are ramping up production massively. This is going to have an impact on the overall number for OPEC oil production. Noted Naeem Aslam, chief market analyst at ThinkMarkets

“Best case scenario, I see the markets celebrating in the short-term the fact that extending the production cut could lessen the supply glut, but I expect reality to rear its ugly head sooner rather than later. It would be then that we could see the price dropping once again” he added.

Mr Aslam also noted that during this volatile period, there could be some good trading opportunities to be had if as predicted, the oil price moves between $40 and $50,

“The ideal scenario could be to look for an entry when the price is trading in the low $40s and look to take profit when it is in mid $50s.” he said


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