OPEC Meeting Unconvincing – Analyst

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crude oil

FXTM VP of Market Research Jameel Ahmad comments on the OPEC meeting and what this means for the commodity.

While the Oil markets are attempting to maintain gains following the latest OPEC meeting, I remain unconvinced whether the outcome to the gathering actually means anything for the price of Oil in the long run. If anything, the tone coming from St. Petersburg was more of a sign of unity and confidence that the current production deal, and path that is being followed, will eventually rebalance the markets.

Although the willingness of a major Oil producer such as Saudi Arabia to make deeper cuts sounds great on the surface, OPEC is still trapped in what could be described as a “mission impossible” scenario. The cartel is ultimately being trapped between a combination of an ongoing oversupply in the atmosphere, being pressured towards making further cuts and not being in control of production from elsewhere around the globe.

This ultimately all comes back to the same issue – OPEC is no longer in control of the industry in the same manner that it used to be, and the cartel no longer has the dominant say over the overall volume of global production. Even though OPEC and some Non-OPEC members are showing high levels of flexibility to cut production, if increased production is still noticed from producers outside of the agreement, the price of Oil will remain pressured in the longer run.

What would have encouraged the drastic bounce higher in valuation that Oil producers would love to achieve? An unexpected announcement that OPEC will make deeper cuts to the current arrangement. The major issue with this is that it would still not deter other producers, including Shale producers in the United States from turning the taps higher on increased production in such an event.

The OPEC meeting in St. Petersburg was simply a renewal of commitment by OPEC and non-OPEC members to respect their current production cut deal. For this reason, I am unsure whether this current bounce can continue and it is likely more hopeful in my view that the commodity will stabilize around its current levels.

Unless OPEC is able to encourage additional Non-Members and producers from elsewhere to join the party to cap output, we still appear to be a long distance away from rebalancing the market. I even remain doubtful as it stands that the Oil markets will be able to beat the 2016 high in December last year above $55.

The headline that Nigeria has pledged not to top daily production of 1.8 million barrels per day means very little in terms of the ongoing oversupply in the market, when you consider that this “cap” is still above the latest data showing that Nigeria’s daily output is around 1.64 million. When you also consider the recent threat than an OPEC member such as Ecuador could have been considering leaving the production cut deal does also indicate the element of stress that the production cut agreement is putting on those taking part in the production cut.

My final take is that it is still very difficult to be bullish on Oil as it currently stands.

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