OPEC Crushes Crude

Market Trends - 07/12/2015

West Texas Intermediate crude oil fell by nearly 2.50% on Friday and continues to tick lower since the weekend reopening after the Organization of Petroleum Exporting Countries decided against slashing production levels despite an ongoing supply glut that has relentlessly pressured oil prices lower. The whole foundation upon which OPEC’s existence is built is the idea of setting production targets to influence international pricing. The output change that occurred during the meeting was the raise of the long exceeded 30 million barrels per day, set four years ago, to a figure of 31.5 million barrels per day, reflecting current output rates. The Saudi Oil Minister, last week, discussed the possibility of reducing the country’s output by approximately 1 million barrels per day as long as other oil producers worldwide would follow suit. However, after it became clear that certain members would not follow suit, the idea was quickly quashed.  Iran nuclear sanctions are nearly at an end, with markets fearful of a deeper glut in coming months.


The escalating battle for worldwide market share is worsening as evidenced by the deep regional divide between Saudi Arabia and Iran, driving OPEC policy into chaos. The leaders of Iran refused to cut oil production in the coming year as they work to regain market share lost during the sanction periods. At this point, energy prices are expected to drop even further in the coming year, up until the next OPEC meeting scheduled for June of 2016 in Vienna. Economists and traders are firmly in the camp of oil prices staying lower for longer, with limited likelihood of a rebound towards $50 per barrel soon. West Texas Intermediate broke the $40 level and is currently below $39 per barrel while futures contracts for December 2017 are trading at $51 per barrel. Brent, the most widely traded crude contract, is trading just a bit higher than $42 per barrel with the first futures contract that shows oil above $50 expiring in the second half of 2017. With futures prices reflecting the softness, no near-term rebound should be expected on the back of no OPEC policy adjustments.

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