3 Reasons We Should Be Cautious on Oil

Members of the OPEC oil cartel will meet on May 25th, mostly likely to extend oil production cuts. Following a meeting in Vienna last year, the cartel decided to reduce the production of oil to stabilize prices. The production cuts met close to 90 percent compliance during the first four months of its 6-month tenure. Now, the cartel seems to make a bigger push towards price stabilization by extending restrictions for another 6 months. The question is- is it too late?

Oil Prices

Recently, Saudi Arabian oil minister pointed out that cuts could be extended far beyond 2017. However, experts remain cautious even after the Brent index jumped 1 percent after his statements. Here are three reasons why caution is still called for.

Price Stabilization Vs Market Share

 

What OPEC fails to realize is that they have lost their dominance over the global oil market. They will have to come to terms with this fact sooner than later. Oil prices slumped in 2014 and remain low beyond OPEC’s control. Even after production restrictions, the cartel could not push the prices beyond the pre-2014 levels. The cartel will have to decide whether its primary focus is to achieve a price floor or establish their market share. Considering demands stays stationary at current levels, the cartel needs to prioritize its goals. Prices may surge after extension of cuts for 6 months but it may not be long enough to go back to their golden days.

Demand is Low and Slow

 

The world is moving towards cleaner, greener, and more sustainable energy sources. The demand for oil had slumped lately, which is outside of OPEC’s zone of control. Vitol Group, the bigger oil trader in the world, suggests that lower demands could bury OPEC’s dream for price stability. With US output growing by 400,000-500,000 barrels a day and demand remaining weak, it is unlikely that the oil cartel will be able to achieve its dream.

OPEC Needs to Prove its Credibility

 

The credibility of OPEC as the largest oil cartel is at stake. General Mohammad Sanusi Barkindo confessed the same in April. The Secretary General of the cartel clearly mentioned that the ‘credibility’ of the cartel had to be maintained. After the Vienna agreement, the cartel could pump up the oil prices by 19 percent. However, with rising oil prices, US produced more shale oil and the overall rise was still half of the 2014 levels. Brent is at $49.23, down by 0.18 percent on Tuesday. Various oil producing nations still have large stocks of oil and non-participants of the agreement continue to pump production.

While further production cuts are welcome, OPEC would need much more than bare compliance to jump back to its feet.