Oil price: Bears take over

Last time around when an OPEC meeting was due back in November 2016, oil prices had soared considerably, even before the decision came out. Things have changes since, and now with another OPEC meeting round the corner, oil prices have taken a dip, despite expectations of a theoretically favourable outcome in the May 25 meeting.

International crude oil prices took quite some beating last week, shedding more than 5 percent in a single day’s trading session. Prices have not rebounded since as anxiety seems to have taken over. Hedge fund managers are fast losing confidence in OPEC’s ability to rebalance the market. There are more and more voices supporting the notion that OPEC is no more the most important player in the market, as shale and non-OPEC members now demand more attention.

The bearish sentiment has not come as a surprise as the buildup was seen in the preceding months. A weak U.S. GDP of under 1 percent, rising U.S. rates and a correspondingly rising U.S. dollar, increasing U.S. supply and domestic rig counts, declining U.S. demand for gasoline, have all combined to send oil prices into what Goldman Sachs has termed a “capitulation” point.

The upcoming OPEC meeting in Vienna may still be important. Not because it has legs to fuel any bullish sentiment to the market, but it can still dictate if crude oil can go crashing further south. Even if OPEC decides to maintain production cuts at current levels, there are no guarantees that it will actually work. Many smaller OPEC members are already feeling the pinch, and ever rising US rig count and inventories have built huge pressure on large non-OPEC oil producers.

Many bullish hedge funds of late have also started to finally give up on a short-term turnaround and have decided to cut losses instead. The normalization of crude stockpile now is estimated to take much longer than earlier expectations, and it may stretch to the middle of 2018. All this while, US shale operators have been pumping relentlessly. OPEC may try and play the same trick to push shale operators to the corner by pushing the prices further down – but technological advancements have meant shale operators now have a new breakeven point at much lower levels.

All in all, it does not seem too rosy for oil prices in the near-term. The OPEC meeting is keenly anticipated, and carries the potential to make or break. For Pakistan, this may extend good fortunes, as idle power plants can be run on furnace oil without really having to worry about costs.