After the Organization of the Petroleum Exporting Countries (OPEC) and its allies delayed their much-anticipated Sunday meeting, the oil markets are now on the edge.
OPEC announced on Thursday that the ministerial gathering scheduled for Sunday would now take place on December 5.
Barbara Lambrecht of Commerzbank AG said that oil prices were moving sideways Friday. “Partly because a postponement by OPEC+ to increase production, originally planned for January, had been almost a certainty,” she stated in a report.
Lambrecht stated that the delayed OPEC+ has brought some uncertainty back to the market.
Lambrecht stated that “officially, scheduling conflicts were cited as a reason. But there was speculation as to whether, as it has been in the past, there were difficulties formulating a common production strategy.”
Prices remain wide-ranging ahead of the meeting
Analysts predict that oil prices will remain in a range of fluctuation leading up to the OPEC summit next week.
Sriram Iyer is a senior research analyst with Reliance Securities. He told ICD that despite the importance of this meeting, the low liquidity on US markets on Friday due to early closing and the Thanksgiving holiday on the Thursday could pose a problem.
Iyer said
Prices could therefore remain in a range before the meeting.
The oil prices were under pressure this week because of the easing Middle East tensions after Israel and Lebanon’s Hezbollah reached a ceasefire agreement mediated by the US.
The market is focusing on the OPEC+ summit for further clues. Prices are expected to drop by 3% this week.
David Morrison is a senior analyst at Trade Nation and he says that the “technical view” of West Texas Intermediate has not changed.
OPEC+ is left with a difficult choice
Market chatter before the OPEC+ ministerial gathering indicated that the cartel has little choice but to extend the production cuts once again.
Since the start of this year, eight members of the cartel have cut oil production by voluntarily reducing it by 2.2 millions barrels per day.
Saudi Arabia, de facto leader of the group, alone is responsible for 1,000,000 barrels of production per day.
The voluntary production cut was due to expire this June.
These were then extended four more times to support oil prices.
Iyer is noted as:
The reason behind the pushback is that prices and demand have not risen. OPEC has been waiting for China to rebound since the second half 2024, but this hasn’t happened.
Few weeks ago, there were reports that Saudi Arabia was willing to abandon its desire for higher prices of oil in order to gain market share.
Experts say that if the cartel reverses some of its production cuts made in January and increases its output, this could spell the end for the oil market.
Saudi Arabia and OPEC are in a way tied to their hands because an increase in production would result in a significant glut.
The oil price could fall even more.
Oversupply Fears
According to the International Energy Agency, the oil market is still fairly well-supplied.
The IEA also said that even if OPEC did not unwind some of its voluntary production cuts in January, there will still be excess crude oil on the market next year.
According to estimates by the Paris-based energy monitor, global oil demand growth is expected to be below 1 million barrels a day in 2019. Non-OPEC oil supply is also expected to increase by 1.5 million barrels a day.
If OPEC+ opens the taps in January, crude oil will flood the market.
There is also the expectation that the US oil and natural gas production will increase dramatically under Donald Trump’s presidency.
Trump is expected unveil a broad-ranging energy plan which would increase drilling of oil and gas on federal lands and off the coasts of the US.
It is expected that the President-elect will also rollback several climate regulations passed by the current administration.
The US is one of the largest producers of crude oil in the world.
OPEC could extend the output cuts by three months
Commerzbank says that OPEC+ could extend its steep voluntary output by three months until the end of March 2020.
Lambrecht stated that “in principle” the production increase would be delayed for at least three more months. Otherwise, there was a danger of a massive oversupply in the oil market.
Morrison, of Trade Nation, echoed this sentiment:
The group will likely announce another extension of its long-standing production cuts beyond this year. Saudi Arabia and Russia have borne the brunt of these cuts. They’ve helped to keep prices in check.
Lambrecht said that the rescheduling could also indicate an indecision about formulating a clear plan of production.
The numerous consultations that took place in the lead-up to this event may also indicate it. We suspect, however, that it is more about the individual quotas rather than the overall plan,” she said.
The United Arab Emirates, for example, was given a gradual increase of production starting in January because it had invested heavily in expanding its capacity.
In the last few months, UAE also produced more than their mandated quotas.
It may not be as easy to extend the production cuts beyond this year, as the market would have you believe.
This post OPEC+ extended output cuts: a hard decision amid market uncertainty first appeared on ICD
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