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What’s Next for the Oil Market?

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Not that industry buys oil in any vast quantities, now that we have switched to gas, but the status of the oil market runs through many of the products and processes that are prevalent particularly in our manufacturing today – chemicals, pharmaceuticals and plastics industries, road building and making of synthetic materials plus the traditional use in many parts of the world for heating and electricity generation plus of course distribution, an industry which is very dependent on diesel and petrol prices. So, having enjoyed low oil prices for virtually two years now, can we expect this to continue and, if not, and prices rise, what could be the impact?

In December 2014, Saudi Arabia led OPEC to announce that oil output would be maintained and that OPEC would not cut production to balance supply and demand and manage the price. This was a surprise move against expectations from those that follow fundamentals and technicals, which is something that OPEC does from time to time. Now two years on, as both the EIA and IEA see the market balancing in terms of supply and demand during 2017, Saudi Arabia has acknowledged that the price it has had to pay for this strategy has damaged its economy and, as an aside, affected all other producers similarly. Therefore, the decision was taken during the International Energy Forum Meeting in September in Algeria to call the 170th Extraordinary Meeting of the OPEC Conference in which it was proposed that OPEC output should be reduced to between 32.5 and 33mbpd from 33.6mbpd. Market watchers from afar discounted that this could happen but for those with the inside track on OPEC, the chance of a deal was very close indeed, with discussions involving both OPEC members, led by Saudi Arabia, and Russia.

Since then, intense lobbying has taken place between OPEC members and non-OPEC producers to effect a deal while Mohammad Barkindo the new OPEC Secretary General has been flying around the world visiting all concerned, inviting many non-OPEC producers to attend the 171st OPEC Meeting on 30th November in Vienna. At the same time, OPEC members have been visiting and liaising with each other to build up support for the deal.

The main deterrent is that countries like Iran and Iraq have put forward what they feel are valid arguments allowing them to continue increasing production while countries like Libya and Nigeria struggling from civil war or unrest are striving to return to their traditional output levels. So with many other OPEC members increasing output to make up the slack from those that have reduced, the dilemma for OPEC is how to make the deal work. Russia will probably attend and will appear interested as President Putin has said that he will support some level of initiative to improve the price, but Russia will probably want all OPEC producers to participate irrespective of current circumstances before committing to any form of cut or output freeze.


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