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Crude oil prices are moving up before OPEC+ meeting

Crude oil prices

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Crude oil prices are rising by more than 1% on Wednesday before the OPEC meeting next week, which is expected to agree on another quota deal and limit production. The closure of the largest British oilfield in the North Sea for maintenance also supported prices.

The Brent oil futures rose by 0.81 USD, or 1.34%, to 61.21 USD per barrel, and US crude oil WTI rose also by 0.81 USD, or 1.57%, to 52.37 USD per barrel.

Crude oil trends

The Buzzard oil field, which yields about 150,000 barrels per day, was temporarily closed after discovering corrosion. As a result, commercial sources argue that three cargo tankers that were to be loaded in December were canceled.

Despite the rise in oil prices today, the commodity futures are still about 30% below its value in early October due to the pressure from the oversupply and the weakness of the stock markets. The fall in crude oil prices since October is now comparable to the 2008 crash and is deeper than in 2014-2015.

The Organization of Petroleum Exporting Countries (OPEC) will meet at its headquarters in Vienna on December 6 to discuss its production policy.

The OPEC meeting will follow the gathering of the G20 countries in Argentina this weekend, which is expected to discuss the Sino-American траде dispute as well as oil policy.

While analysts expect some form of quota deal at the OPEC meeting, the moods of oil markets remain negative. The traders have cut their overall long net position on oil futures with a total of 607 million barrels over the past eight weeks. This is the largest decrease for this period of the year from at least 2013.

Golbal oil production

By the end of November, oil production in Saudi Arabia reached a historic record of 11.2 million barrels per day. At the same time, the quota established by the OPEC+ agreement is 10.5 million barrels. Along with the enhanced development of deposits, Riyadh is actively selling oil from its reserves.

All this is happening against the background of unprecedented volumes of oil production in the United States. Since the beginning of the year, the US oil production increased by 2 million barrels per day and today a record 11.6 million barrels per day.

As a result, according to investment bank JPMorgan, the world production now exceeds demand by 1.2 million barrels per day. The experts remind that the same gap between supply and demand was observed in 2015 when the crude oil prices collapsed below 30 USD per barrel.

Saudi Arabia’s oil policy

The most curious thing in this situation is the position of Saudi Arabia. The Kingdom is experiencing great financial difficulties, and in early November, Energy Minister Khalid al-Falih admitted that for Riyadh the optimal cost of black gold is 70 USD per barrel.

Analysts at the International Monetary Fund consider this estimate to be greatly underestimated. In their opinion, the kingdom’s state budget will be deficit-free only at 88 USD per barrel. Thus, Riyadh needs a rise in oil prices, for which production needs to be reduced, not increased. The Saudis themselves agree with this.

“The market situation indicates the need to reduce shipments by 1 million barrels per day compared to October”, said Khalid al-Falih on November 12 after an extraordinary meeting of the OPEC+ monitoring committee. He even promised that in December, Saudi Arabia will reduce production by 500,000 barrels per day to ensure the restoration of oil prices. However, the actions of Riyadh raise serious doubts about the sincerity of such statements.

The fact is that now the Saudis are forced to listen to Donald Trump more than its partners in OPEC+.

Scenarios for oil price trend

The meeting of the OPEC+ group (the cartel together with Russia, Mexico, and Kazakhstan) will be essential for the further oil price trend. However, while it is still unclear what the overall solution will be, pressure on prices will continue.

The analysts of Goldman Sachs expect a high volatility in oil prices until there is evidence of an improvement in the key oil and gas supply and demand indicators. This means that prices may move up and down until a clarity from OPEC+ is achieved.

In November, Saudi Energy Minister Khalid al-Falih ensured that the group must shrink production by 1 million barrels per day, but now the country has record yields

Also, there were doubts that the Riyadh authorities are ready to cut the yield after Trump publicly supported the Crown Prince Mohammed bin Salman in connection with the murder of Saudi journalist Jamal Khashoggi.

The authorities in Saudi Arabia “work closely with us and are sensitive to my requests to keep the price of oil at a reasonable level”, said Donald Trump.

Russia, for its part, has not yet sent a clear signal of the necessity of shrinking the yield.

The analysts expect the OPEC meeting on December 6 and make connections with the one on November 27, 2014. Then the parties to the cartel made the decisions: limiting yields to support prices or allowing values to fall without shortening production and without giving market share to their US solar competitors. In 2014, OPEC launched a strategy to protect its market share to the detriment of prices. On the next day, following the disappointing November meeting of OPEC, the oil prices fell 10%, and a month later, the fall was 25%. The decline continued until 2016 when OPEC+ agreed on a contraction in total yield.

Currently, OPEC faces the same dilemma – to support prices or market share.

However, the market situation is now different from the one in 2014, and in favor of OPEC. Surviving low prices from 2014-2016, other oil producers in the United States have become more flexible and can produce oil at a profit even at a price of 30 USD per barrel.

Despite the current oil price depression, the analysts of the Economist Intelligence Unit expect the Brent average price to be in the range of 70-80 USD per barrel in 2019-2020. The company even predicts a scenario in which the price reaches 100 USD per barrel after unplanned supply difficulties.

The likelihood of reaching a new quota deal by the OPEC+ group is very high. In the first place, the price of oil of about 60 USD per barrel is not comfortable for Saudi Arabia. Secondly, the US yields continue to grow, and this means that other countries will have to cut their own production to balance the market.

Further price reductions, as well as the recent rise to 80 USD per barrel, are related not to fundamental factors but to economic factors.

Collapse, as it happened in 2014, is unlikely – in the first place, there is no such excess supply over demand, secondly, OPEC+ can always intervene in the situation and shrink the yield.