Oil prices are back to being highly volatile again – after a brief period of relative stability. The latest production numbers released from OPEC suggests that the compliance levels have been much closer to the targets – as against market expectations of being termed too ambitious. Russia has continued to join hands with OPEC suppliers – and together the production cut is now close to a million barrels a day.
Russia, though has appeared rather less supportive this time around – with calls from within Russia growing in dissent of being part of such an extended production cut and freeze deal. It would not come as a surprise, if Russia gradually pulls out or continues to miss the compliance marks. Saudi Arabia has been the biggest contributor in the overall cut, closely followed by the UAE and Kuwait. Efforts are seemingly underway to put a stop on prices falling any further, as the risks of global demand slide become ever so evident. The US shale production on the other hand, has continued to grow and the oil rig count over the past few months has been on the higher side.
It is astonishing that such high level of production cut compliance has not sent the prices soaring yet. That is because the other supply side issues are too big to ignore, and the OPEC alliance’s actions could work only as far as balancing the market to current levels. Market experts have singled out the US and China trade talks and the outcomes as the most important determinant in terms of the medium to long term direction of oil price and ignoring the supply side risks of late.
The fundamentals on both the sides are currently balancing each other, as the supply cuts have been met by projections of a significant global economic slowdown – which could continue deep into 2021. In such a scenario, the policy risk becomes the biggest factor, adding a vulnerability premium, on both upper and lower ends.
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