Oil Prices Drop Again
Oil prices have fallen below $50.00 a barrel. This time, turmoil in Asian markets signaling further risk of lower demand added to internal OPEC woes. It seems that the long-promised agreement on OPEC’s proposed production cuts will be difficult to implement. Pressure from expectations of plentiful U.S. reserves and Iraq’s doubts as to how much oil fellow OPEC members are producing—Baghdad suspects more—have forced prices to drop. But the performance of Asian markets remains the main source of negative pressure.
Crude oil prices were starting to rise this week, but U.S. West Texas Intermediate (WTI) finds itself back to under $50.00 a barrel. Suspicions that bickering OPEC members are producing more than what they are claiming have also increased. One of the most contentious items is OPEC’s daily production limit of between 32.5 million and 33 million barrels a day. Last September, OPEC exceeded that quota, extracting an average of 33.4 million barrels a day.
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Iraq, OPEC’s second-largest producer, has fired the first shot over the weekend to contest the agreement. It argued that it needs revenue from crude flowing to finance its ongoing war against the Islamic State. In addition, the country disputes that its monthly production level is much higher than officially acknowledged by the cartel. (Source: “Oil futures settle below $50 for first time in a week,” MarketWatch, October 25, 2016.)
When Iraq hit the brakes, demanding it be excluded from any agreement to freeze production, prices fell. Iraq produces 4.77 million barrels a day. But this was expected; Iraq wants any reduction to come at Saudi Arabia’s expense, rather than cede even a small part of its current output.
This raises questions about the next OPEC meeting on November 30 in Vienna, Austria. The intent is to squeeze total production to below 33 million barrels per day. Iraq has fractured OPEC’s ability to persuade major external players like Russia to cut their production as well. The fractions within OPEC suggest that oil prices will remain under pressure in 2017.
Nigeria, Libya, and Iran are also reluctant to commit to output cuts according to Tariq Zahir, crude trader and fund manager at Tyche Capital Advisors, LLC in New York. Others have even more dire predictions of WTI falling to $47.00 per barrel, and Brent Crude to between $48.00 and $48.50 per barrel. (Source: “Oil down on OPEC worry, offsetting U.S. inventory fall,” The Globe and Mail, October 26, 2016.)
