Easwaran Kanason

Co - founder of NrgEdge
Last Updated: June 24, 2017
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Business Trends

Brent and WTI are in bear territory, having crashed 22% from the year's highs. You can call crude over-sold, you can put it down to technical and algorithmic trading. But you can't ignore the fact that it is more than just fickle, volatile sentiment this time: the OPEC/non-OPEC cuts may be removing up to 1.7 million b/d from the market, but the growth in US, Libyan and Nigerian output is putting more than 1.5 million b/d back, leaving net reduction at less than 200,000 b/d. OPEC and its non-OPEC collaborators are in a corner, but if the Saudi and Russian energy ministers stand behind their “whatever-it-takes” pledge of last month to rebalance the markets, the time has come to deepen the cuts. It won't be easy, but it is not impossible and a far more suitable option for OPEC than admitting defeat.

The writing is on the wall for OPEC: it needs to cut more.

Of course, the producer group could continue advising patience to the world for the elusive evidence of a decline in global oil inventories, as it has being doing for the past few months. But this week proved that no one is listening any more.

Crude’s clumpy cascade this week into bear market territory could be put down to algorithmic and technical selling, but for the purposes of this discussion, the mechanism behind the latest downward spiral is moot. OPEC needs to respond not to the crude traders’ seeming paranoia, but to the fact that its current quantum of cutbacks have been all but neutralised.

OECD oil stocks rose by an average of around 360,000 b/d over January-April according to International Energy Agency data and are expected to have remained stagnant through May.

US production has climbed by close to 600,000 b/d since the start of 2017 and Libya and Nigeria, OPEC members exempted from production cuts under the November 30 agreement, are boosting supply by a combined 600-700,000 b/d. Together, that more than wipes out the 1.16 million b/d pledged reduction in supply by the 11 OPEC members restraining output since January.

As a matter of principle, OPEC maintains a healthy disdain for short bursts of price volatility, no matter how large, as far as adjusting its supply policies is concerned. While that is understandable especially in the current situation for a group pursuing an inherently slow process of restoring equilibrium to a market that has been out of balance for three years, it is now time to heed the price signals.

OPEC has been written off several times in recent months, and the same body of sceptics now thinks it will fail to rise to the latest challenge. We maintain our view that the bloc has determination and commitment behind its new marketbalancing role under the Saudi leadership, and is unlikely to give up. And that means it has to respond.

oil market update market insight oil prices update oil market currents oil market news OPEC oil balance shale
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