To say that the past year has been interesting for traders following the price of crude oil would be an understatement. With prices down to record lows recently climbing to 3-year-highs, the past couple of years have been quite tumultuous for oil. Now as OPEC is meeting to decide the future of crude oil, we thought it would be a good idea to provide you with a solid overview of the situation.
The oil market found itself in a condition of oversupply in 2014-2015, which caused a dramatic drop in prices. The Organization of Petroleum Exporting Countries took it upon itself to solve this problem through an agreement between member states to keep their production levels low and wait out for supply to gradually match demand. Russia, a key player on the oil market, though not a member of OPEC, willingly joined this agreement and followed the same approach. Throughout the past two years this decision has produced significant results, with oil currently trading steadily above $70 per barrel, the highest it has been since 2014.
Yesterday OPEC members gathered in Vienna to decide whether they want to continue with this so-far successful policy or perhaps start unwinding the measures they put in place two years ago, in light of the recovery of oil prices. Some analysts have argued that there is still quite a bit of volatility associated with oil. More specifically, it is hard to estimate how much of the recent oil price highs are due to OPEC’s strategy, and how much stems from the fact that Venezuela, which is in the midst of a major financial crisis, is struggling to keep its oil industry running, thereby reducing the supply on the market, as well as the dissolution of the Iran nuclear deal, which would mean Iran has to limit its oil exports once again. There have been other previously unforeseen factors that boosted oil prices, such as a major pipeline outage and conflicts in Turkey. This is why many would like OPEC to continue operating within the current limit until prices are safely above $80 per barrel. However, Russia is pushing for an end to the agreement, since they believe the market is stable enough. Saudi Arabia is also ready to increase production levels, largely on account of sanctions on Iran, which would leave a gap in supply that has to be filled.
Iran has so far expressed their disapproval of any production increases right now. Unless the other OPEC members convince them, Iran can veto the decision reached during the meeting. That is why this particular summit is quite strenuous. In fact, the oil minister of Iran Bijan Zanganeh left yesterday’s meeting early because he did not wish to discuss production increases. Earlier today, however, he mentioned to journalists that OPEC is currently coming up with some sort of deal, so there is still hope that a consensus might be reached.
The markets are generally prepared for the news of an increase in production by about a million barrels per day. A decision like this would bring oil prices down slightly, but their overall recovery might still continue. However, a bigger increase has the potential to push oil down more noticeably.
Right now OPEC ministers are negotiating away from journalists’ prying eyes, so there is no decision yet.
