- The Writer holds an MSc from Creighton University and is a PHD candidate in the Turkish National Police Academy
Oil exporting countries which have long suffered from low oil prices have been seeking a solution to ease their financial woes. With an awareness of a strong dollar pressure on prices, the global oil surplus, and low global economic growth, they have been in negotiatıons for nine months either to curb their oil production or to freeze it at their current production levels. The results of the unofficial meeting in Algeria in September show that oil producers have gained some ground, but it looks as if they need to do more to obtain a consensus on either an oil production cut or an oil freeze at OPEC’s meeting in Vienna on Wednesday, Nov. 30. Now all traders are keeping a close eye on any developments leading up to the meeting and are looking forward to its results.
Let's look firstly at what happened in the oil markets last week to gauge the indicators prior to the meeting -- the dollar index, weekly American Petroleum Institute (API) and Energy Information Administration (EIA) crude oil inventories, weekly U.S. Baker Hughes rig count as well as news from unofficial OPEC meetings.
-Summary of previous week
The week began on Nov. 21 with a wrap up meeting of OPEC members. The previous week’s trading ended with prices at $46.89 per barrel. However, oil prices surged up to $49.15 from $46.92 within the day with affirmative comments from the participants, especially Iranian Oil Minister Bijan Namdar Zanganeh and Iraqi Oil Minister Jabbar Al-Luaibi who said they supported OPEC in reaching a deal. Russian President Vladimir Putin also shared his country’s eagerness to obtain a consensus by stating that OPEC will probably agree on oil production cut in the next OPEC meeting. With these statements, and the decrease in the U.S. dollar index, oil prices settled at $48.90 at the end of the day.
Following the news coming from OPEC’s unofficial meeting, the second day of the week started with optimism and a slight increase in prices to $49.96 per barrel but the increase in the U.S. dollar index offset such a price rise at $49.12 at the end of the day.
On the third day, the high U.S. dollar index in spite of the more-than-expected decline in weekly API crude oil inventories, which were announced at the end of the previous day, caused the prices to fall to $48.56, but a greater-than-expected decline in weekly EIA crude oil inventories helped the prices regain losses within the day, and it settled at $48.95 at the end of the day.
On the fourth day, the decrease in the U.S. dollar index eased off on prices, and moved in the narrow range during the day. The end of the day saw the price at $49.00 per barrel.
The last day of the week began with doubts that OPEC members were removing obstacles to the agreement on an oil production cut. This resulted in a price drop despite the decrease in the U.S. dollar index, with the closing price per barrel at the end of the week at $47.24.
The U.S. FED seems to be on the cusp of introducing an interest rate rise at the next meeting on Dec. 13-14. For oil prices, this means that a strong dollar will keep pressuring prices as was the case over the last three years. On the demand side, no big improvement was seen due to low global growth rate. As a result, the official OPEC meeting will become more significant.
The nine month-long OPEC talks to finalize an oil cut or freeze, conducted by members led by Saudi Arabia, Algeria and Venezuela and non-OPEC oil producers, led by Russia, failed to deliver. The one official OPEC meeting was unsuccessful in reaching an agreement, but at the end of September at the unofficial OPEC meeting, positive sentiments were expressed that could lead to an OPEC consensus on an oil cut in the upcoming official meeting on Wednesday.
There have been many official and unofficial declarations released by OPEC members and non OPEC members alike. In short, Russia is willing to keep to its oil production at its current levels and calls OPEC members to freeze oil production at the current output levels. On the other hand, OPEC members plan an oil production cut to around 32.5 million barrels per day, despite the lack of enthusiasm from Iran and Saudi Arabia. For political reasons, Iraq and Iran want to increase their output similar to Saudi Arabia and its Gulf allies. According to news from the last OPEC experts meeting last week, the difference between an oil production cut which Saudi Arabia offers and what Iran wants is only 200,000 barrels per day, which should be negotiable between them if they really want to have a consensus on an oil cut.
OPEC easily agreed its last oil production cut eight years ago at 4.2 million barrels per day because of the global economic crisis. But now it is unlikely that OPEC will cut around 1.2 million barrels a day – a level which is much less than the last oil cut. The reasons for this change in OPEC’s decision are as follows:-
· U.S oil production has increased by 50 percent per day through unconventional production methods
· The removal of Iranian sanctions has seen Iran’s output increase
· Iran’s influence on Iraq’s governance has intensified
· Iran and Saudi Arabia have been in a proxy war in Yemen for two years.
The current dispute over an oil production cut in OPEC is not because of commercial reasons, but is down to political competition which will determine whether there is a consensus on oil production cut in the upcoming OPEC meeting.
Oil prices are likely to reach $53 or over it despite the possibility of a FED interest rate hike if OPEC members agree on the oil production cut. But rather, it can plummet swiftly to $40 or lower within two weeks. Market volatility can be very high, but oil prices will potentially strike a balance in the range between $45 and $53 in the short term.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.