- The Writer holds an MSc from Creighton University and is a Ph.D. candidate in the Turkish National Police Academy
OPEC countries led by Saudi Arabia and non-OPEC countries led by Russia finally made their decision on the oil cut extension at OPEC’s 172nd meeting on May 25 after long discussions. However, oil markets to date were disappointed with the agreed nine-month oil cut extension decision without greater oil cuts preferring the longer 12-month anticipated extension. Oil markets will continue to evaluate the outcome of the decision up to the Fed meeting in June, taking into account the oil production rise in the U.S. as well as high stockpiles in the U.S.
Oil markets last week will be reviewed based on the U.S. dollar index, weekly American Petroleum Institute (API) and Energy Information Administration (EIA) crude oil inventories, weekly EIA field production of crude oil in the U.S. and the weekly U.S. Baker Hughes rig count.
Brent oil prices began the week with a rise to $53.87 through a decrease in the U.S. dollar index and on expectations of an extension on the oil cut output from the OPEC meeting despite a rise in the U.S. Baker Hughes rig count from the previous week. It continued up to $54.17 on Tuesday with high expectations of the prolonged oil output cuts. In addition, the decrease of 1.5 million barrels in U.S. oil inventories compared to the previous week as reported in the weekly API report on Tuesday also supported higher prices despite a rise in the U.S. dollar index.
On Wednesday, the price declined to $53.96 due to the increase to 9.32 million barrels per day in U.S. oil production ending May 19 as reported by the U.S.’ weekly EIA crude oil production. This price reduction was despite the decrease in the U.S. dollar index and the lowering of U.S. oil inventories by 4.43 million barrels compared to 1.75 million barrels from the previous week as reported in the weekly EIA report.
However, following the decision on a nine-month oil cut extension based on the same reduced quantities, oil prices plummeted to $51.46. It nonetheless regained some of its losses and settled at $52.15 at the end of the week despite a rise in the U.S. dollar index and two-count rise in the weekly U.S. Baker Hughes data.
In brief, although prices increased with the expectation of the oil cut extension with deeper cuts or possibly with a 12-month extension on the eve of the OPEC meeting on May 24, it sharply declined because only a nine-month oil cut extension decision was agreed.
Why did they opt for a nine-month oil cut extension with unchanged output levels?
· Participants considered that further price increases would encourage more production from U.S. shale producers and deep-water oil producers.
· They expect that the rise in U.S. shale production would falter in the second half of 2017 and that U.S. stockpiles would start to soon fall.
· They anticipate greater oil demand in the U.S. with the start of the driving season and with further demand from Asia.
They refrained from using all available instruments to impact prices including deeper oil cuts with more participants both from inside and outside OPEC countries or through reducing oil exports.
Last Friday Russian Energy Minister Alexander Novak said that OPEC and Non-OPEC countries could change the terms of an oil cut agreement at any committee meeting held every two months.
However, U.S. shale production could rise over the course of this agreement until the end of March 2018. In addition, FED interest rate hikes could boost the U.S. dollar index during this period impacting oil prices.
Brent oil prices dipped below $53 and WTI fell under $50 following the agreed oil cut extension decision. The markets will closely watch the changes in the U.S. oil inventories and in U.S oil production in the run up to the FED meeting. Brent oil prices could reach over $53 if strong declines in U.S. oil inventories and production occur, if not, declines towards $50 are likely.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.