The recent OPEC meeting and the declaration has been seen as a positive indication on cutting down the Oil Glut. Everyone is upbeat about the recent announcement of possibility in production cuts by OPEC members. In fact the Market has responded immediately with lot of optimism and enthusiasm with Oil trading above $52 per barrel and everyone has started suggesting it to reach $60 per barrel soon after.
What are the real economics behind the new forecast… If we go by the OPEC’s declaration of cut in production, it will eventually result in a mere cut of anything between 240,000 to 700,000 barrels per day. It is known that currently the market is oversupplied with about 1.4 – 1.7 mbopd, then how much the cut from the OPEC alone is going to impact the over supply and the market price… The following chart helps put things in perspective:
The other contributors to the oversupply include the productions from North America which includes off course the USA and Canada & Mexico with Russia and other non-OPEC countries. Now, if the OPEC’s action is coupled with similar cuts by other Oil Producing countries and the total cut in production is effectively reduced by 1.5 mbopd and all agree to keep the production on similar scale increasing at the same rate as the demand, then the Oil Price would probably reach a decent level of $60 per barrel and may sustain there until the market dynamics are altered again. How high will it go above $60 is quite difficult to say… it may remain range bound between $60-$64 until things change again. Factors that will keep the price higher would be the Winter season demand in the European and US market, Economic statbility in China and hence may see increase in demand and overall market sentiments.
The key points from Iraqi Oil Minister to be noted where he has suggested production increase in the year 2016-17, Iraq is currently in no obligation to cut the production and free to produce as much; it will probably follow and insist on same arrangement to keep producing and even increasing the production as indicated. Further, it is known that US Shale oil acts as a price ceiling factor at $60 per barrel and hence, if the province starts to climb above $60 mark, more and more drillers will start operating again and even push their output to benefit from the price increase and start to square off their losses.
It is well estimated that the Oil will touch $60 per barrel by the end of the year and as Saudi Minister stated enthusiastically “Yes… $60 is a possible by the end of the Year”. Lets wait and watch how the new arrangement work out.