Just a few days ago, perception was rife that the two - Saudi Arabia and Russia - would not show signs of loosening amid US sanctions on Iran and the resultant decrease in oil output with the probability of crude oil prices touching $90 a barrel significantly higher than a drop back to the sweet range of $60-70. However, the up and about crude oil prices have recently seen a slip as capricious Saudi Arabia along with Russia has started showing signs of breaking the coordinated production cut pact.
Saudi Arabia and the other members of Opec along with some other major oil producers including Russia have been sticking to the yearlong production cut targets since January 2017 that removes around 1.8 million barrels of oil per day from the value chain, in a bid to reduce world crude oil supplies and support oil prices that went crashing down in late 2014.
The concerns over potential increase in output by the Saudis and the Russians in response to concerns about risks to supply from Iran and Venezuela along with rising US production are good reasons for oil price rally to slow down. While some analysts believe that the effect on crude oil prices will be benign in the short term, others are worried even of the optics: some OPEC members and Russia are meeting in Vienna later this month, which could possibly include discussion over their change in stance. So while the ramp up in production might not start soon, only the idea of discussing the matter soon can keep oil prices tamed for some time.
On the other hand, some facts that might keep oil prices from derailing on reviewed production quotas include continuing robust global demand; US shale oil not coming online till 2019; geopolitical tensions in Libya and Nigeria; and most importantly, Saudi Arabia requiring $88 a barrel to support their Vision 2030 and ensure a successful IPO of Aramco.
In short, these recent developments can actually leave global market baffled as the investors remain clueless - struggling to make sense where the oil prices are headed with production loosening on one hand and geopolitical and economic risks on the other. Mind you, this again is a conundrum – and it’s well known what uncertainty does to oil prices!