It is hard to recall an OPEC meeting that proved to be more uneventful than the latest one. Under usual circumstances, a decision as big as the one calling for an end for a long held production freeze, would have led to significant drop in oil prices. But Opec is just one small variable in the present day scenario, where demand is rising and supply disruptions elsewhere are disturbing enough. Oil prices were last seen trading at a 42-month high, nearing $80/bbl – and closer to Saudi Arabia’s ambition of oil at $88/bbl to bolster the Aramco IPO.
The initial reaction to the OPEC announcement was a sudden sharp drop in Brent prices – but that did not stay long. Bear in mind the global stockpile of oil has reached unprecedented low levels. Couple that with strong and rising demand and the supply drop from Venezuela – it offers a grim scenario of oil supply going forward.
Russia and Saudi Arabia are expected to ramp up production to the tune of half a million barrels per day from as early as next month. This has resulted in some major US shale producers to halt the drilling, which could nullify the impact of the increase from OPEC and Russian production. More importantly, the enforcement of strict US sanctions on Iran is gaining more acceptances and that threatens to take away a sizeable chunk out of the international crude market.
In a scenario of high demand, supply disruptions in major oil producing countries such as Canada, Iran, Libya and Venezuela for various reasons, and ever diminishing global crude oil stock – the chances of oil prices remaining north of the current rates are high.
The biggest variable right now is the global crude stock, which is touching multiyear lows – and any potential increase to the tune of even a million barrels per day would not be enough to compensate for the heightened risk premium of reduced stockpile. Some surveys have shown that investors are not writing off triple digit oil prices by as soon as the end of 2018. From what it appears, the days of OPEC dominance and dictation are numbered – and the demand dynamics have taken precedence in the oil market.
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