October 05, 2016

Prior to the OPEC (Organization of the Petroleum Exporting Countries) meeting held on 28th September, oil traders have been speculating on whether oil demand will continue to increase, whether it will be a cold winter, what the impacts of Brexit will be and so on. But mostly the oil traders were speculating on the activities of OPEC and what was going to happen in the rumoured meetings. 

At the beginning of September an “informal” OPEC meeting in Paris, came the news that a possible production output freeze was imminent. Oil prices promptly headed sharply upwards, but after a vague post-meeting announcement, this soon ran out of steam and prices tumbled back down and fell to a lower level than before the rally started.

Another OPEC meeting (this time including Russia) was then scheduled for 28th September, and it was agreed that for the first time in eight years, the production of crude oil will be cut. As you can imagine, this saw prices act accordingly (up), but even though prices have started to rise, they are still lower than OPEC members want and the continued low oil prices have had a devastating effect.

The other option is the much talked about output freeze (which has now happened). In the short-term, such a move would probably push prices into the $50 - $60 range. After that, an output freeze would only prevent the world supply glut increasing in size and would do nothing to fundamentally address the overall supply versus demand imbalance. Don’t forget, the ever looming shadow of shale oil. Due to the tumbling oil prices, this part of the industry has reacted impressively with labour and rig rental costs being dramatically reduced. The result is that overheads for US shale operations are down by 65% since 2014 and with no public infrastructure projects to worry about, many shale oilers are still making a pretty decent living at $50 per barrel.

Now the OPEC production freeze has become a reality, this may be the green light for even more shale oilers to come back into the market.

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