The price of oil

The price of oil
Oil prices have continued to rise due to an oil worker’s strike in Nigeria and the ongoing outage of the Forties pipeline. OPEC countries along with Russia have recently..

Oil prices have continued to rise due to an oil worker’s strike in Nigeria and the ongoing outage of the Forties pipeline.

OPEC countries along with Russia have recently agreed to extend their output cut till the end of 2018.

Background

Organization of the Petroleum Exporting Countries (OPEC) is group comprised of 14 oil producing nations. It was founded in 1960. The current members of OPEC are - Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Indonesia used to be a member, but it suspended its OPEC membership in December 2016.

From 2010 until mid-2014, world oil prices were around $110 a barrel. However, price of oil has fallen significantly in the recent years. It is now around $50. To address the sluggish prices, OPEC nations came to an agreement in November 2016 to cap their output until the oil glut was reduced.  In May 2017, they agreed to extend that deal by nine months. This isn’t the first-time oil prices have been severely hit due to a glut. Prices of oil fell in the 80s due to falling demand. It resulted in a six-year decline in the price of oil.

In July 2017, the OPEC nations met once more to discuss plans on whether they should further cap oil output by 1.8 million bpd beyond March 2018. The meeting was held in Russia and was attended by non-OPEC oil producing countries as well. During this meeting, Saudi Arabia, announced that it will limit its oil exports to 6.6 million bpd (barrels per day). This is a million-bpd lesser than the previous year.

OPEC’s October output fell by 80,000 bpd to 32.78 million bpd.  OPEC is now adhering to the pledged cuts by 92%. In September 2017, it was 86% in compliance with the deal. Saudi Arabia has taken the leadership in these efforts and has announced that it had further cut crude oil allocations for November by 560,000 barrels per day. Analysts also expect Russia to hold its end of the deal.

Analysis

In November, due to various factors, price of oil rose to its highest since mid-2015. Brent crude futures LCOc1 were up 59 cents at $61.53 per barrel having hit a session peak of $61.70 earlier.

On December 2017, OPEC as well as Russia announced that the nations would continue to maintain the output cut till the end of 2018. This was done in a bid to ensure global oil prices do not collapse. OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8 million bpd. These two countries had been exempted from the deal in the past as both nations have been grappling with political and economic unrest.

Recently, Nigerian oil workers threatened to go on an indefinite strike after mediated talks with the authorities reached an impasse. The workers are fighting over allegations of wrongful termination. This strike would have a detrimental effect on the country’s output and exports. In addition, there is also on ongoing outage of the Forties pipeline, which carries North Sea oil to Britain. These two factors have further caused the oil prices to increase.

As a result, Brent crude futures LCOc1 was at $63.72 a barrel, up 49 cents. The LCOc1 is generally considered the international benchmark for oil prices. “Oil prices are getting a bounce... as the Nigerian oil union talks have hit an impasse and will begin strike action,” said Stephen Innes, head of trading for Asia/Pacific at futures brokerage OANDA.

“The force majeure ... is acting as a major prop for crude,” said Sukrit Vijayakar, director of energy consultancy Trifecta. However, the rise in prices may be temporary as US production has continued to rise. The country’s output is fast approaching that of top producers Saudi Arabia and Russia. The growth of US shale output will determine whether OPEC’s efforts will yield results as expected by member nations. The EIA expecting U.S. output to average 10 million barrels per day in 2018.

Assessment

Our assessment is that an output cut alone will not be enough to push oil prices upwards. The increase in US shale will likely prevent prices from increasing in 2018. However, if there are any outages or OPEC countries continue to comply with the agreed upon deal, then prices are likely to hover $60 per barrel. It is imperative for OPEC to begin drafting an exit strategy for the output cut deal, so it does not negatively affect the markets when and if it ends in 2018.

Comments