OPEC Meets and Stays Put; Oil Climbs Above $51/Barrel

June 9, 2016--The Organization of Petroleum Exporting Countries (OPEC) held its 169^th meeting in Vienna, Austria on June 2, 2016.  The 13-member cartel declined to take any coordinated action on oil production.  This decision follows an April 17 meeting in Doha, Qatar, that involved a 12-hour marathon negotiating session in which the group also failed to reach agreement on a production freeze or a production cut. 

The main sticking point in the April meeting was Saudi Arabia’s refusal to agree to a production freeze unless Iran was a party to the agreement.  Iran declined to attend the meeting.  Iran’s position is that it does not want to agree to a freeze until oil production reaches pre-sanction levels, which Iran puts at four million barrels per day.  Iran’s production has already reached 3.5 million barrels per day.

West Texas Intermediate (WTI) oil prices began declining in August 2014, and reached a low of just over $26 on February 11, 2016.  Since that time, oil prices have almost doubled, closing at over $51 on June 8, 2016.  The reason for the increase is a combination of supply and demand, along with supply disruptions.  Nigeria, Libya, and Venezuela have all experienced disruptions in supply in the past few months.

In Nigeria, militant attacks on the country’s oil infrastructure have reduced production by as much as 500,000 barrels per day (b/d).  Nigeria normally produces about 2.4 million b/d. Current production is about 1.65 million b/d.  Wildfires in Canada cut production there by at least one million b/d. And Venezuela’s oil production has fallen by at least 190,000 b/d since the first of the year, due to dire political and economic conditions there.  PDVSA, the Venezuelan oil company, has to make $5 billion in bond payments this year.  Given current conditions there, the company’s ability to make this payment is now in question.

On May 14, 2016, Flow Research published a White Paper on Oil Production, called “Oil’s Wild Ride, 2^nd Edition.”  In this White Paper, we projected that oil prices would reach $55 by September 2016.   In light of recent developments, this projection now seems conservative.  

On May 16, 2016, Goldman Sachs called the end of cheap oil.  According to the firm, after two years of oversupply, the market actually slipped into a supply deficit in May 2016.  Goldman Sachs cited supply disruptions and stronger demand from China, India, and Russia as the reasons behind this change.  "The market likely shifted into deficit in May ... driven by both sustained strong demand as well as sharply declining production," said the investment bank.  In a research note, Goldman Sachs predicted that the oil market would remain in deficit in the second half of 2016.  It predicted that oil would average $50 per barrel during the second half period. 

Is Shale Oil to Blame?

Why did prices decline from August 2014 to February 2016?  One major reason is an increase in US oil production.  Most analysts attribute the increase in US oil production to the advent of shale oil technology.  Through the process of hydraulic fracturing, or “fracking,” it is possible to obtain oil from wells that were once thought to be “dry,” or non-productive.  This process has significantly increased the total crude oil out of the United States and other countries as well.  Fracking has become somewhat controversial, due to its environmental effects, which are still being studied.  Even so, the advent of the technology of fracking is one of the major reasons for the increase in oil supply, and for the imbalance of supply and demand.

Note: For more discussion of this topic, see Flow Research’s Worldflow Flash Report on Oil Prices.  You can receive a complimentary copy of this report by sending an email to jesse@flowresearch.com, or responding in the comment box below. 

We encourage you to comment! Please enter your comments below, which are emailed to Flow Research. After review, they will be posted back to this page. Thank you for your participation.

Thank you!

Flow Research, Inc.

27 Water Street

Wakefield, MA 01880

(781) 245-3200

(781) 224-7552 (fax)

info@flowresearch.com

www.flowresearch.com