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OPEC sees vindication for production cut deal
A key consideration at this time that is vividly different from last year is how regional Asian crude term contract negotiations will proceed.
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A Saudi Aramco oil installation. Analysts say Saudi Arabia’s new leadership is trying to use the oil price collapse to remake the country’s economy. (AFP/Marwan Naamani)
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lmost one full year after Organization of the Petroleum Exporting Countries’s (OPEC) landmark decision to hold production at 32.5 million barrels/day (b/d), oil prices crossed a significant upward barrier, with the December ICE Brent crude oil contract breaching US$60/barrel in the last days of October this year, up almost $10 year on year.
Then, OPEC members and 10 non-OPEC producers led by Russia, committed to cutting a combined 1.8 million b/d from the market, in a bid to lower record high crude oil inventories. The initial six-month deal was extended in May this year to March 2018.
Despite unrelenting United States production and five-year average highs in global oil inventories, a consistent even if pockmarked effort by OPEC countries to rein in monthly production and exports seems to have convinced the market that had been trading in a $50-$55/b range for the majority of the previous quarter.
Earlier in August, supply shortages on the back of weather conditions in the Pacific Ocean had already tipped the balance of oil fundamentals in favor of a bullish outlook as the Brent crude oil futures structure flipped into backwardation — a market condition where the prompt price of a commodity is valued higher than its price in the future. Backwardation generally means the market is willing to pay more to receive oil now rather than later, and highlights shortage or urgency of the commodity in question.
The last year has seen fierce competition between oil producers from the OPEC, non-OPEC bloc as well as from US sources, and Asia has taken center stage in terms of buying activity.
However, the backwardated market structure and resurging oil demand from Europe and the US has resulted in rising costs of delivering non-Asian arbitrage crude to Asian refiners, who have been left to contend with proximal choices such as Middle Eastern, Russian or Southeast Asian crude barrels.
A key consideration at this time that is vividly different from last year is how regional Asian crude term contract negotiations will proceed.
