Surge Drives Oil Prices Lower
Despite a bevy of public agreements to slash their production levels, members of the Organization of the Petroleum Exporting Countries (OPEC) have continued to ramp up output to a record 33.5 million barrels per day, according to S&P Global Platts.
Analysts suspect they are trying to squeeze out as much crude oil as possible before complying with earlier promises to curb production levels. (Source: “After Pledging Cuts, OPEC Countries Pump Record Amounts of Oil,” The Wall Street Journal, November 8, 2016.)
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The agreements go into effect later this month, so time is running short for these resource-rich nations to stockpile their crude inventories.
Data from investment bank Simmons & Company International show that Russia added roughly 500,000 barrels per day since the start of September. Meanwhile, Libya and Nigeria have also ramped up production, bringing another 500,000 barrels into markets every day.
As a result, U.S. oil prices fell more than 14% in less than three weeks. They landed at $44.56 at the time of writing, far below OPEC’s ideal level. After WTI prices cratered in the autumn of 2014, barrels of crude oil ended up in the $30.00 range, but they recovered to above $50.00 in recent months.
This winning streak was broken by an internal fracture at OPEC. While there are strong incentives for the group to collectively slash production, it isn’t in any one country’s interest to be the first one curbing their production. They risk losing market share by cutting first.
The conflicting incentives are why countries like Russia, Iraq, and Libya are pushing against the upper bounds of their production limits even while publicly supporting cuts to output.
But these actions have consequences. Investors are growing skeptical of whether or not OPEC can engender the necessary trust between its members to make this deal possible. If they cannot coordinate lower output, then there is little hope for higher crude oil prices in the near future.
Investor skepticism is manifesting itself through downward pressure on oil prices. Analysts believe it is primarily responsible for the recent losses and that it poses further downside risks.
In fact, a Goldman Sachs Group Inc report shows that by scaling up production, OPEC countries are on track to supply as much oil as they would have without the cuts.
