|So far so good! There is no ambiguity concerning the fact that all oil producing countries including OPEC and non-OPEC members are working together to stick to their commitment to end the deterioration of oil prices. We are heading now to the end of the third month of the agreement to reduce surplus, and things are looking positive for the oil prices which is stabilizing and hovering around $55 per barrel.|
However, it is stubbornly refusing to hit the magic number of $60. Why is it so? Why isn’t it moving upward? Is it the lack of market confidence or is there still too much oil in the market? Or does the oil industry believe this is the right and fair price for oil under the current circumstances? Despite the assurances given by Saudi Arabia concerning its willingness to decrease production further if required, everyone so far has been fully complying with the accord and behaving in line with their signatures.
The market is certainly shocked to witness such a complete adherence, as it is the first of its kind in the history of OPEC, especially with Russia abiding by its commitment in curtailing its oil production. However, this indicates how every oil producer was hurt by the low oil prices and the sudden loss of revenues by more than 60 percent. They knew something had to be done to stop the decline in oil prices which was on the verge of falling below $30 per barrel.
What will happen next? For how long will the oil producers live with an oil price of $50 per barrel? What will it take to bring the prices up again? Certainly, OPEC must get rid of the current surplus of oil in the market quickly. We need to see some increase in the demand for oil in order to empty the market of any surplus. Surplus oil is the decline that OPEC was expecting especially with absence of increase in the demand as most industrial countries were still searching for some economic growth which was not forthcoming. The oil market probably needs one full year of such compliance to oil reduction, which will be towards end of the third quarter of this year, in order to enjoy better oil prices.
Indeed, oil market is in need of one full year of oil reduction in order to bounce back again. Oil countries must wait for another six months and be patient in order to reap the fruits of their action.
We still have to keep a tight budget and borrow from overseas financial institutions or from the Central Bank, as is the case with us in Kuwait. Today, the banks are more than happy to lend money, knowing that oil prices will bounce back, considering the current behavior of oil-producing countries mostly worldwide. So far its good news! And the house of OPEC is in order.
By Kamel Al-Harami
Independent Oil Analyst