In November 2016, OPEC members – as well as non-members - agreed to coordinate on Oil production cuts, because market conditions and the medium-term outlook were not considered strong enough to achieve price stability. From January 1st, 2017 a “production adjustment of 1.2 million barrels a day” was implemented, an adjustment scheduled to last for six months, with the option of renewing it for another six months.
On Saturday December 10th, 2016, the need for joint action by the most important Oil-exporting countries was recognised to satisfy both producers and consumers. As a result, non-OPEC producers, including Russia and Kazakhstan, agreed to reduce their Oil output by 558,000 barrels a day.
Analysts were initially optimistic about the agreement, believing it would help the Oil market to stabilise. However, prices have continued to fall, with traders maintaining their negative market outlook. Meanwhile, US production has increased significantly, offsetting the efforts of the most important Oil-exporting countries. American crude output has surged, with increasing rig counts recorded for 11 consecutive months.
The Oil price collapsed a week ago, reaching its lowest point since late November 2016. The commodity is now trading below the key psychological level of USD 50, due to weak demand, the refinery maintenance season, and increased production by several non-OPEC countries, which are not party to the international agreement. U.S. production has grown by more than 10% since mid-2016 to reach 9.3 million bpd, close to the output of Saudi Arabia and Russia.
On Wednesday, oil prices increased by more than 3% (WTI at 47,33$ and Brent at 50,16$), as we’ve seen the largest decline in US oil inventories this week since the beginning of the year. Iraq and Algeria mentioned that they agreed with Saudi Arabia to extend the global agreement to reduce the oil production.
On Monday, the Energy Minister of Saudi Arabia, Khalid Al-Falih, attended the 19th Asia Oil and Gas Conference in Kuala Lumpur, Malaysia, saying: “Based on the consultation I have had with participating members, I am rather confident that the agreement will be extended into the second half of the year and possibly beyond”.
OPEC will meet in Vienna on May 25th, when its members should decide either to extend or end the production cut agreement. In the meantime, every statement from major players in the energy sector could trigger volatility in the Oil market, significantly impacting prices.
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