Oils traders have been watching OPEC and OPEC+ meetings closely – even though their attempt to stifle oil production had been derailed, both by some of its own members and by the U.S. ramping up their own production to offset the slowing of production. Their intent was to slow production to diminish global crude reserves – bringing the price of oil up.
Although recently we have seen oil inch up and fall slightly today, Tuesday – Brent was trading at $63.34 and US light crude was trading at $57.61 – it seems that the OPEC+ 1.8 m barrels/day cut didn’t seem to as effective as they hoped. At this point and taking into consideration the impotence of the production cut agreement amongst the countries of the cartel, some market watchers are wonder whether the agreement will even be extended.
Analysts from Goldman Sachs are backing up this estimation, saying the outcome of the upcoming meetings are uncertain. The biggest factor some people are noting is the negative impact the cuts had on the Russian economy in October – Russia being the world’s biggest crude producer. Ironically the recent oil price peak, with its high on Friday at $59.05, wasn’t a result of the OPEC cuts but the temporary shut down of the main crude pipeline between Canada and the US named Keystone.
Even if everything goes OPEC’s way and even Russia agrees to an extension, the US and its non-cartel counterparts will inevitably ramp-up output, like they did previously, much like in September when oil prices were stuck between the $45 – $50/barrel mark. This is largely attributed to the increase in Shale extracting, which reached peak production as OPEC’s efforts to cut production fell flat.
There is also side-ways effects, although superficially higher oil prices should benefit producers, prices that are too high tend to stifle demand as people seek alternatives to fossil fuels. For example electric cars have lost a big part of their market share due to the recent drop in oil prices. Another layer to this complex hydrocarbon cake, is the fact that higher prices instigate increased production and the danger for another implosion of the price.
It is a very good estimation at this point that the next OPEC meeting will be a negotiation between Russia and the ad-hoc head of OPEC Saudi Arabia in the hopes that they can reach a compromise, which ultimately sees Moscow back the agreement. Some estimate that even without the backing of Russia, OPEC will still go forward with the cuts extending them well into 2018. With Russia and most of the America’s producing at normal capacity or even more – these cuts are likely to be ineffectual.
It seems at this point that Saudi is more preoccupied with Russia than it is about its frictions with Iran. Ironically it seems that markets have the same mentality even though a conflict between these two countries could potential cause an increase in oil prices (due to a drop in production or the damage caused by arm conflict to oil facilities).