The situation on the oil market has been very dramatic in the last few years. After a prolonged period of record high oil prices, the market crashed due to oversupply in 2015, with major price drops well into 2016. OPEC took steps to contain the crisis by agreeing to cut down their production by 1.8 million barrels per day in order to alleviate the oversupply and allow prices to grow naturally, and were joined in this effort by a few non-OPEC states, such as Russia. So, how have they been faring so far?
In terms of their commitment to the plan, one can hardly fault OPEC. All member states have been complying with the agreement, and they even managed to agree on an extension, as it was supposed to expire last year. OPEC realized the market was not yet healthy enough for regular production levels, so they agreed to keep the cuts in place in 2018 as well. Russia, who is another major oil producer, has also been complying with this policy, even though it is not a part of OPEC. It seems that all of these countries are in agreement on this issue and have shown they can work well together.
The production cuts have had a very positive result on the oil market. By reducing the amount of oil available on the market, the price for the black gold slowly climbed up past the psychological levels of $50 and $60 last year. In late January, also helped by some conflicts in the Middle East and several pipe outages around the world, oil prices managed to reach $71 per barrel, their highest for the last three years. However, while analysts may have hoped that that was a sign the oil market was finally getting over the crisis, prices did not continue to climb - in fact, they have since retreated from this level and stay more in the proximity of $65 per barrel, on average.
It is easy to understand this: prices rose when OPEC severely limited supply, but would lower again if supply increases. The threat for OPEC’s plan has always come from one place in particular: the United States. The US have cheaper methods of producing oil, particularly by focusing on shale rather than crude oil. It is so cheap for the States that they were still able to make a profit even during the oil crisis when OPEC were panicking over the low prices and what that entailed for member countries’ GDPs.
Over the past year, while OPEC and Russia were doing everything they could to keep production lower to boost oil prices, the United States continued to increase its own output each month, breaking its own records time and again. This has continued in 2018 as well. We recently received reports from both OPEC and the International Energy Agency that for the first time in a few months the overall oil output globally has increased rather than decreased. This means supply is beginning to outgrow demand once again.
Basically, after months of growing production in the United States and lowering production from OPEC, the market is finding itself in a state of oversupply once again, despite OPEC’s efforts. This can severely impact the prospects of oil prices rising and stabilizing in the near future.
What we need to pay attention to now is how demand is changing on the market and whether it can account for the higher supply. Furthermore, OPEC might try to take action and negotiate bigger cuts, though that is not very likely. In any event, we have learned that the oil market is not likely to stabilize this year.
