Cuts will continue. So, prices should stay strong or stronger?

When the leader for oil production says that it will maintain the cut for oil production and they will continue this until Q1 2018, this means they are serious in ensuring prices remain strong. Less oil, less supply and this meant that should demand stays the same, the prices would remain strong or stronger. Here’s one full article about their resolve. Saudi minister confident of oil cut extension Its (Saudi) energy minister said he is confident that the cuts will be extended to boost prices. He was quoted as saying that Russia will support this cut. He said, “We have full commitment from the Russian side, including President (Vladimir) Putin himself.” Currently, the oil prices hover around US$50 per barrel. If we still remember, it used to be over US$100 per barrel just less than 3 years ago, in mid 2014. Yes, as usual get ready for higher petrol prices when this happen.

In another news article in Oil rises on U.S. inventory draw as OPEC beckons, it says that oil prices are rising because the U.S. crude inventory has continued to show a decline for the past 6 weeks. Of course, the US$ and the oil price goes in the opposite direction. When the US$ trembles, the oil prices would go up. In other words, if the US$ continues to depreciate with some internal issues, then oil prices should continue to rise. Let’s also note that the U.S. production for oil is increasing and is now at 9.3 million barrels per day which as per the article is already close to what Saudi and Russia top producers could produce. This also meant that if oil cuts are to be effective, then perhaps Saudi and Russia and other OPEC countries would have to do more. Perhaps do it over a longer period of time? Let’s note that if one side reduces but another side increases and the overall inventory continues to go up, then the prices is not likely to stay strong.

First of all, low oil prices does not mean everything is good. It could also mean that the demand for oil is low simply because most economies are not moving much. In terms of oil prices however, I do not think it will ever go back to those US$100 per barrel levels. The reason is because OPEC is no longer the only group that could control majority of oil productions in the world. The U.S. shale oil producers have proven to be extremely resilient. They did not disappear even when the oil prices was US$35 per barrel. I think it’s a good balance. Oh yeah, before everyone say that oil prices would remain low, do note that any sudden crisis, for example a war will change everything overnight. Happy pumping petrol.

written on 21 May 2017

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