Global oil markets have seen the potential bullish effects of a recent surge in drilling by the U.S. dampened by high-level comments from OPEC member countries suggesting that the organization may impose a price lid.
U.S. crude inventory data have shown surprisingly robust growth as the country has engaged in a new wave of shale extraction, rebounding its drop in production by 5 million barrels for the week of October 14 with a likely growth of 800,000 barrels this week, for a total of 469.5 million barrels.
While analysts had predicted growth, recent weeks have seen surprising falls in inventory and stock prices for the world’s largest crude consumer. U.S. petroleum futures recently saw their biggest single-week drop since 1999.
Meanwhile, OPEC members have already begun engaging in verbal sniping and strategic wrangling to influence the outcome of a November 30 meeting, to be held in Vienna, that may lead to an agreed cut in output and a lid on oil prices.
Iraq, the second-largest petroleum-producing OPEC member state, stated that it would request exemption from any output curbs because of its dire need for funds used to fight the Islamic State. Iraq’s potential to derail the deal caused a drop in many oil futures indices. Iraq may only be willing to freeze at its September level, according to some observers.
Extensive information on the proposed nature of the cuts has not been made public and any deal will likely require acceptance by Russia, which collaborates closely with OPEC to control world crude prices.
Despite Iraq’s desire for exemption and the high level of recent hostility between member states Iran and Saudi Arabia, the November 30 deal is widely expected to go through, largely because member states will retain the ability to ignore the proposed caps within the non-binding agreement. Each country has an incentive to produce more oil to increase its market share to the detriment of its competitors.
The deal has drawn mixed reactions from investors.
“At best, Russia is prepared to freeze its oil production at a non-specified level. Iraq is demanding that it be exempted from any production cuts, and the same applies to Libya, Nigeria, Venezuela and Iran,” said Commerzbank analysts on a pessimistic note.
Robbie Fraser, commodity analyst at Schneider Electric, said “Iraq’s noncommittal merely serves as the latest example in a string of reminders that an OPEC agreement on paper will not automatically translate to an OPEC agreement in terms of actual supply.”
Others felt more hopeful about the potential of a sustained rise in global crude prices, which for the first time have remained steadily above $50 a barrel.
“The fundamentals are improving and the mere fact that crude stockpiles continue to decline, surprising the markets week after week, suggests nothing more than a strong rally ahead,” said Peter Cardillo, chief market economist at First Standard Financial.
“We continue to look for the $50-$55 trading range to prevail with $55 oil prices by year-end.”
“Expect more of this choppy interplay until more concrete news emerges, as speculative buying runs into record producer selling of the futures contracts for hedging”, said Jeffrey Halley, senior market analyst at OANDA brokerage in Singapore.
“What traders do not like is backpedaling”, said Naeem Aslam, chief market analyst at ThinkMarkets. “When you look at the OPEC potential supply agreement, you have so many players saying different things. The picture is incredibly muddy and this is dragging the price of oil lower.”