In September, it seemed all was rosy with the Organization of Petroleum Exporting Countries’ (OPEC) initial talks of a production cut to salvage the dipping price of crude oil in the international market. This led to a period of sustained increase in the price of the commodity in the market.
However, two months later and the story is not the same. There are serious doubts as to the feasibility of the oil cuts and this has forced a dip in crude oil prices. Hussein Sayed, Chief Market Strategist at FXTM, discussed the reasons why the production cuts are not likely to be effective nor likely to materialize.
First, according to Sayed, more and more members are opposed to the notion of the production cuts. Iraq and Iran were the first to back out, while Libya, Indonesia and Nigeria all seem to be joining that bandwagon. With more and more countries, not willing to reduce production, it is unlikely that others agree on a deal to cut production.
Second, even OPEC member nations are not sure of the efficacy of a production cut on increasing oil prices. A major deterrent to increase in oil prices even in the event of a production cut is the US crude stockpiles. In one week alone, US crude oil production increased by 14.4 million barrels. Save that OPEC can agree on a production cut more than the surplus that the shales are producing, then the supply will continue to exceed the demand, and prices will continue to fall. And such an agreement is highly unlikely as OPEC members would not smile at losing too much market to shale oil production.
Add to these reasons the tensions between Saudi Arabia and Iran, which would hinder the likelihood of one accepting a cut while the other gobbles up more market share as well as the lack of formal deal between Russia and OPEC, and you see why oil prices are likely to remain low for a while. This is definitely bad news for countries dependent on revenue from crude oil sales as they remain stuck in a conundrum.