Yesterday the Organization of Petroleum-Exporting Countries held their long-awaited summit in Vienna. OPEC members met the expectations of investors perfectly by agreeing to extend their current agreement to reduce oil extraction past its expiration date, from March 2018 until the end of next year. This decision was also accepted by non-OPEC state Russia, who is one of the leading countries in terms of oil production and exports and also plays an important role in the market for oil.
OPEC first implemented this agreement in 2016 and officially began their production cuts in January this year. Their efforts paid off by allowing oil prices to increase to two-and-a-half year highs, making many investors hopeful that the oil market is close to a balance. However, analysts warned of the persisting risks of sliding back into an oversupply, especially considering the United States’ continued increases of oil extraction. Experts warned that the initial duration of the agreement until March next year is not enough, so OPEC members listened and chose to prolong it till the end of 2018.
Yesterday’s decision to extend the agreement was in many ways good for the oil market. Investors are happy to see that OPEC is careful not to cause another oversupply and will continue to watch the issue closely and would look for a careful way to phase out of the cuts when the market is ready. In addition, this time around Libya and Nigeria also signed the agreement (they were not a part of it until now).
Nevertheless, the outcome of the meeting did not prove to be of as a significance as previously hoped. While oil prices are stabilizing around the level of $60 per barrel, they did not receive a big push from yesterday’s decision. This clearly shows that OPEC does not have the upper hand in the oil market anymore. Whatever price increases they are able to cause with their production cuts, experts still keep a close watch on the United States’ shale oil industry.
The US is able to produce shale oil at much lower prices than OPEC’s crude oil. This is why the American markets remained largely neutral to the oil crisis and the United States never stopped increasing their oil production. Experts are now warning that the increasing prices of oil might trigger an appetite in the States to open more oil rigs, which could potentially drive oil prices back down.
All in all, what we can say about the oil market is that it appears to be moving towards a balance, but there are still many risks involved that could cause unpredictable changes. Some OPEC member states struggle with internal political conflict which could cause sudden interruptions of their normal oil-related activities. On the other hand, the United States lead their own oil policies and could turn the tide at any moment. Our best advice is to keep an eye on the news, plan your trades very carefully, and always have an exit plan.
