Uncertainty Over Crude Oil Production Cuts

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Spend Matters welcomes this guest post from Rajiv Joarder, market analyst at Mintec.

Crude oil has been a hot topic of conversation among traders, investors and manufacturers alike since prices plummeted back in 2014. Throughout 2015, and the better part of 2016, continued price volatility for crude oil has been attributed to various factors including economics, geopolitics, weather, transportation and many more. However, few news headlines attracted as much attention as OPEC members meeting to agree production cuts. Until recently, OPEC countries had decided to pump record volumes to preserve their market share in a response to the rising share of cheap shale gas from the U.S.

Crude oil prices have risen 3% since mid-September and are currently up 40% from the start of the year, in anticipation of OPEC production cuts agreed by members for the first time in eight years (at an informal meetings held in Algeria on Sept. 28). Members agreed to limit production to between 32.5 bbl/d to 33.0m bbl/d. The lower end of the target is equivalent to a drop of approximately 750k bbl/d from current production levels. However, the group will decide targets for each country at its formal meeting in November. Russia, which is not part of OPEC, also announced the country was ready to cut or freeze its production to help stabilise the global market.

Crude oil prices were also supported by reports that the global over supply could be falling, with stock levels lower than usual ahead of the winter demand. There were unseasonal falls in U.S. crude oil stocks, down 26.5m bbl over the past seven weeks, partly due to hurricanes, which disrupted production and tanker supplies.

However, prices have fallen back recently as buyers lose faith in OPEC’s ability to actually agree on production cuts. There is disharmony between Iraq, Iran, Nigeria and Libya, with suggestions they might not freeze production at all. OPEC members are due to meet again officially in Vienna on the Nov. 30 to finalise details of how much each member country should cut production. The situation has been exacerbated by Russia over its uncertainty regarding production cuts, having earlier agreed to them.

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