OPEC's recent accord to shut off more than 6 percent of its production this past week has been met with mixed feeling amongst traders. As we moved closer to the day of the meeting its seems that the oil bulls were running rampant, driving prices for crude to levels that top just above the US$ 50 per barrel mark. The great paradox however was to be seen just moments after the much anticipated announcement of a cut in production, at which point we started to see prices ease off slowly as many started to slowly voice concerns as to the impact this agreement would really have on the market and more specifically if it would actually be able to alter the oil imbalance now faced. The truth of the matter is that we were seeing record production figures up until recently and an only 6 percent cut in OPEC’s contribution does not sound like a lot being done, especially given the increased capacities expected to continue to be seen out of Iran and Libya. At the same time, this decision comes at a point were U.S. shale producers have started to greater vigour and have managed to push their output even at this year’s low crude oil prices. What’s stopping them from increasing production further to the extent of covering any gap left behind by OPEC members.
All this has at the moment left few convinced that there will be a real turn around in the market over the coming months. It is no surprise therefore that we hearing officials from Russia saying that they plan to stick to a budget that assumes oil averages at a price of around US$ 40 a barrel. That also seems to be the consensus amongst most major investment banks which see the commodity struggling to hold firmly at prices above that level for long periods of time. On top of all of this many even see the agreement amongst OPEC members as little more than “hot air”, voicing concerns as to its effectiveness given the fact that as an organisation it has often failed to meet targets, especially those that relate to curbing production output.
It seems as though the “cat has been let out of the bag” and it’s proving an ever more difficult case to get it back in. It has been more than 22 months since the original decision to fully open the production taps and producing nations have already shifted in some way or another in order to face the new reality this has brought along with it. It has also shown how the Saudis have underestimated the resilience of the high prices producers (and in particular that of U.S. shale oil) having managed to price cut out of the market only a small fraction. Let’s not forget that the main purpose of their original strategy was to gain market share and eliminate some of the competition in order to end up with bigger control over the market. The only production projects that have truly been hit by the drop in prices has been the deep water offshore projects, most of which found the new price reality unbearable.
There is still a lot at play here, but for now it looks as though we are still set to remain hovering around these most recent price levels for the medium term. For most in shipping this can be seen as good news, helping keep bunker costs on the lower end of the spectrum and allowing a healthier demand level for the transportation of crude oil for the large tankers. There are however some, notably those with the more modern eco-ships which would have hoped for slightly higher increases in oil prices, something that would surely help to make these more economical ships more competitive in the market and possibly even create a greater push for older vessels to be scrapped sooner rather than later.