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Tuesday , October 27 2020

Will further output ‘cuts’ help stem oil price drop?

Outlook does not look positive

Kamel Al-Harami Independent Oil Analyst

Oil prices are indeed falling but will further cuts in production help as we struggle to reach the magic number of $60 per barrel which is currently within reach? Did the settling of the trade war between the US and China push the demand for oil? Or is it the basic structure of the oil market which is awash with surplus from almost every corner of the world? It is hard to see the oil prices reaching $60 per barrel and even harder for the same level next year.

The production cuts agreed by OPEC+ two years ago are still effective, and the compliance rate is above 150 percent. However, this has not been effective in translating it into a solid number for the oil price, which is hovering within the rage of $56 and $57.

This is despite the fact that the agreed level of reduction will be maintained until the end of the first quarter of next year. Now it seems OPEC might be looking for further production cuts or voluntary reductions in the hope of bringing the oil price to at least the magical price level of $60, which is more reasonable and acceptable now to all oil exporting countries. It is now their desired price level.

However, the worry is that further reduction may not help when considering the ongoing increase in shale oil production by the US and non-OPEC countries. Also, there is surplus crude oil available in the market as well as in Iran and Venezuela that are not produced or exported to the world. This hidden or unproduced available capacity is preventing further improvements in the barrel price. Once they return to the market, they as well as the current excess will push the oil price down to $40 level.

This is the concern for now and the future. It seems difficult for any improvements in the oil price. This was illustrated in the last flare up in the Gulf during the standoff between Iran and US, and the attacks and capturing of oil tankers. Nevertheless, oil prices remained weak and hit the $55 level. The question remains whether the strategy of production cuts will work again with the surplus and readily available capacity. There has been further warnings from the IEA that next year will witness more surplus oils in the market. This again is in the absence of Iranian and Venezuelan oils, which one day will return to the market to heap more pressure on the oil prices.

The future oil market’s outlook certainly does not look positive, with current reduction or with future additional cuts. Is it the end of the era of $60 per barrel?

By Kamel Al-Harami Independent Oil Analyst

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