What if the Mid-East oil became too expensive due to local restrictions?

mideast oil

The following article was written by Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).

Ipek Ozkardeskaya LCG

Ipek Ozkardeskaya, LCG

Oil prices are having hard time to keep their head above the water. The energy markets were hit by several waves of sell-off since the beginning of the year and the news flow is somewhat unsupportive of a sustainable recovery in global oil prices.

Almost a year ago, on August 1st 2016, the WTI crude traded at $39.20 per barrel on the back of large global glut and increasing international supply. OPEC members and several large oil producers such as Russia and Iran decided to come up with a plan in order to reduce the excessive oil supply. On November 30th, OPEC ministers agreed to cut their oil production for the first time since 2008. The world’s largest oil producers decided to reduce the production from 33.8 million barrels a day to 32.5 million barrels. The latter announcement sent the price of WTI crude tot $55.24 on January 2017. The Brent crude recovered from $41.50 to $58.30 over the same period.

Unfortunately, OPEC and its allies’ efforts to reduce the production failed to decrease the global oil glut for several reasons. Some nations pumped more oil relative to the agreed amount. Countries such as Iraq and Libya were tolerated to produce more given the geopolitical difficulties they were facing due to the war against the ISIS. Iran has not been hostile to the OPEC agreement, yet wanted to pursue its recovery post-sanctions to reach its daily production target of 5 million barrels. Finally, the US production progressively reached new all-time highs. From November to June, the US production expanded by a solid 9.6%.

Under these circumstances, the results were less than successful.

According to the Energy Information Institution (EIA), the global oil glut didn’t decrease in the first quarter of 2017, it increased instead.

The EIA’s 1Q data dampened the mood in the oil markets and triggered a new wave of sell-off in the black gold.

In the aftermath of the unsuccessful six-month cooperation, the OPEC and Russia decided to extend their production cuts by an additional nine months, estimating that the extension would bring the global glut down to its five year average by the end of the second attempt, March 2018. Disappointed by the OPEC’s decision not to deepen the cuts, the market pulled the WTI crude back to $42.05 in June, the Brent cheapened to $44.35.

Although the June sell-off revived speculations of a new OPEC announcement, such as capping the Nigerian and Libyan production to cool down the selling pressures, OPEC’s Secretary General Barkindo responded that it is too early to talk about additional production cuts and added that he was not aware of Kuwait’s proposal to limit the Nigerian and Libyan production. His latest comments dented the appetite in the buy camp.

The worst is yet to come

The downside risks could enhance as the OPEC’s restriction strategy may bring up another and a more important issue.

News that Indian Oil Corp, India’s biggest refiner, will buy 1.6 million barrel of Mars Blend from the Gulf of Mexico in October due to its more competitive price has recently hit the news wires.

The latest news raised fresh worries. The OPEC’s efforts to cut production have done little to reduce the global supply, yet apparently pushed the Middle East prices relatively higher due to restricted regional extraction. This situation could give way to a major dilemma at the heart of the cartel, fade speculations of more cooperation in the future and continue weighing on energy prices.

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