Crude oil is still being bedeviled by a supply glut that is intent on keeping prices depressed. In the trading week ending June 16, the international benchmark, Brent Crude oil is down 0.17% to $46.92 per barrel and the West Texas Intermediate is down 0.61% to $44.46 per barrel.
OPEC member nations agreed to extend the current oil supply cuts for another nine months but it appears that the current cuts and the news of an extension of cuts are not having any effect in halting the decline in oil. The Brent crude and WTI are down 14.2% in the year to date period and both benchmarks are down 5.65% and 8.01% in the last three weeks that OPEC announced an extension of cuts as shown in the chart below.
OPEC rivals show strong resilience
The main reason oil prices are depressed is that the supply of crude oil in the market is more than the demand for oil. Basic economics teaches us that the price of a commodity normally falls when the supply is more than the demand. The main reason behind the supply glut in crude oil is that OPEC rival producers are ramping up production to pump out record volumes of crude oil.
The U.S. shale industry is having a swell year in 2017 and analysts expect an even greater output next year. For instance, the International Energy Agency says U.S. Crude supply is growing 5% on average this year and that it will grow by an average of 8% in 2018. More so, a Wall Street Journal Survey shows that gasoline inventories rose by 2.1 million barrels, compared to a consensus expectation of a 700,000 barrels decline.
In addition, the IEA has observed that non-OPEC crude oil supplied (led by U.S. shale producers) will continue to grow faster than the demand for through 2018. The U.S Energy Information Administration also notes that U.S. shale oil production will hit a record of 5.475 million barrels in July – the last time U.S. shale oil hit such peaks was in 2015.
Analysts predict oil could drop to $30 per barrel
OPEC needs to take proactive action to end the supply glut and get crude oil back to winning ways. The move to reduce output hasn’t had a material effect on ending the glut even though OPEC is recording decent compliance cuts of about 1.2 million barrels per day. The fact that OPEC granted concessions to some members such as Iran, Libya, and Nigeria suggests that its efforts are half-hearted.
OPEC has also agreed on a deal to extend the cuts for another nine months but analysts don’t think that the extension will have a material effect until OPEC decides to deepen its cuts. Fereidun Fesharaki, a leading global energy market academic while speaking on the sidelines of Credit Suisse Australia Energy Conference notes that “while the demand is robust, there is a serious likelihood that prices will sink next year to $30-$35 a barrel and will stay there for a while.”
Fereidun also thinks that Saudi Arabia as the unofficial leader of OPEC has a big part to play in ending the supply glut. He noted that “you have to cut another 700,000 barrels per day right away or prices will sink… Even if you do this, next year you’ll still have to cut more, so it comes down to how far the Saudis are prepared to cut.”