Testing time ahead for strong oil prices – Focus on output compliance
This news has been read 5105 times!
| One question that is often asked since the issuance of OPEC’s decision last November in Vienna is whether the oil producing countries will honor their commitment to reduce oil production from beginning of this month. |
From now on, the clock will be ticking. Oil consumers will be observing and hoping for someone to crack. Strangely, before the effective date, oil prices began to rise towards $50 and above level to reach almost $60 per barrel. This means the oil markets are confident about OPEC’s commitment.
However, in order to firm up the oil prices, OPEC must get rid of the current high oil surplus which is close to 90 million barrels or equivalent to one full day of consumption. This will take some time, maybe until mid of this year, provided that oil producing countries reduce production by 1.6 million barrels, which seems manageable as long as they are rewarded by handsome profits of higher oil prices. This means that the biggest producers will not mind further reduction of oil production to earn additional income.
The barrel will stay strong in the coming three months due to the winter season and higher consumption rate, causing the prices to probably hit $60 level per barrel. The challenge however will be seen in the end of the first quarter, presenting the real test for OPEC over its complete adherence to its decision to reduce oil production. If they adhere to their own commitment, the oil prices will certainly remain firm and may jump to above $60 level. This in turn may represent a real threat to the conventional oil and the rise of the shale oil. Therefore, OPEC must monitor the price developments so to not be overtaken, to let the prices increase and to invite more expensive oil to come back again.
This time, OPEC will remain committed to its signature, which will lead to stability at a level that will even permit oil companies to invest and explore in oil again after a long dull period.
Of course, the market will remain doubtful about OPEC’s behavior but the real test is in the pudding, which will be known to all of us after April 2017. However, for the time being, the barrel will sail smoothly.
email: [email protected]
By Kamel Al-Harami
Independent Oil Analyst
This news has been read 5105 times!
You must be logged in to post a comment.