Why The Uncertainty Over Crude Oil Prices Will Endure?

Twenty-four oil-producing countries, members as well as non-members of the Organization of the Petroleum Exporting Countries, OPEC, met Thursday, 25 May, and voted to extend their production reduction accord by nine months, to April 1, 2018. The extension aims to rebalance the global oil market and stabilize oil prices. Investors however, viewed the effort as inadequate as oil prices fell about 5% in the wake of that meeting. Prices since ticked upwards somewhat, perhaps in anticipation of product drawdown during the driving season beginning with the Memorial Day holidays; but Goldman Sachs just lowered its 2017 price projections for both Brent and West Texas Intermediate oil grades.

The original production reduction accord ─ which saw a spike in both oil prices and energy company stocks in its wake ─ was signed in November 2016 and was a reversal of an earlier OPEC laissez faire production policy. While OPEC, as has been surmised, adopted that production policy in a bid to drive higher-cost (shale, oil sands, etc.) oil producers offline and garner greater market share, its implementation may have been mistimed. If the policy had been adopted before the massive investment in shale production, it would most likely have killed, or at least significantly deferred the rise of, shale oil; but shale oil, once birthed, has proved resilient.

The raison d’être for this accord extension may be that accruals from the marginal price increase would countervail losses from reduced production. But, with most of these producers dependent on oil proceeds for meeting budgetary provisions, its sustainability remains critical.

Oil Supply

While OPEC and its accord partners have been cutting oil production, United States shale producers have been ramping-up output. The accord provides for the excision of about 1.8 million barrels per day (MMbpd) of oil supply from the global market; but from its inception to the end of June, U.S. shale producers would have added 800,000 barrels per day (bpd) to that market, severely reducing the impact of the accord. U.S. shale oil output is expected to grow by 122,000 bpd in June to about 5.4 MMbpd, per data from the U.S. Energy Information Administration; that would represent an increase of almost 20% over the past seven months.  

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