How Will OPEC Act Next?
Jun 13 2019 Read 119 Times
In the wake of sliding oil prices, it's likely OPEC will be left with no choice but to extend production cuts. As May drew to a close oil prices plummeted by more than 13% over the course of two weeks, a slump that Saudi energy minister Khalid al-Falih described as “unwarranted.” Looking forward to the second half of the year, Khalid al-Falih asserts there's a growing consensus among OPEC+ countries to stabilise global markets and put an end to the downward trend.
"We will do what is needed to sustain market stability beyond June. To me, that means drawing down inventories from their currently elevated levels,” he said in a recent interview.
Looming trade war could threaten oil demand
When asked to comment on the mounting China-USA trade war, al-Falih acknowledged it could trigger a worldwide economic slowdown on oil demand, though was quick to assure investors that Saudi Arabia "will be responsive."
“While tight fundamentals supported oil prices through mid-May, escalating trade wars and weaker activity indicators have finally caught up with oil market sentiment,” reads a note published by Goldman Sachs.
US ramps up production, increases glut
According to the leading investment bank, other major factors at play that could intensify the slump include “mispriced developments” within the market, including the new bunker sulphur regulations introduced as part of IMO 2020. Analysts also refer to growing US shale production which could balance out the pricing differences between WTI and Brent and ultimately, pose a “multi-year threat to the market share and revenues” of OPEC+ countries.
According to the latest figures from the U.S. Energy Information Administration, national crude inventories soared by 15.7 million barrels in May, a monthly increase that hasn't been seen since 1991. As a result, by the end of 2020, Goldman Sachs predicts Brent could fall to as low as US$60 a barrel.
Production cuts set to continue
So what's on the horizon for OPEP? In an effort to prevent a full-scale surplus and deeper price drop, it's likely the oil cartel will keep the cuts in place. The production limits will also be backed by supply outages like the Russian contamination crisis, as well as deepening economic and political. Production is also slowing down in Iran and Libya which could help contribute to promoting a recovery.
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