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Crude oil prices: at a rebound?

When Russia, the biggest crude oil producer outside the OPEC cartel, announced last week plans to cut output, the market price of crude oil reacted promptly following his comments and traded above $51 per barrel. President Vladimir Putin justified it as the right decision to maintain stability in the energy market. Oil prices have increased by 13% since September 27th, the day when the Organization of Petroleum Exporting Countries (OPEC) announced plans to limit output for the first time in 8 years.

This month was marked by significant oil price uncertainty. Along with it, a series of questions emerge: What do these alliances mean for the future of crude oil production? What will be the future behaviour of the crude oil price? Is a rebound in prices looming?

What has happened to crude oil prices since summer 2014

As a highly volatile commodity, the price of crude oil is prone to fluctuations. In the past 51 years the average crude oil price has fluctuated around $48.24 per barrel (World Bank). The 2000s were marked by a global crude oil price boom, driven by growth in emerging markets and abundant financial liquidity. By mid-2014 the price of crude oil was trading above $100 per barrel as part of the commodity super-cycle. During the end of the super-cycle, global oil supply had begun to exceed demand. OPEC, as a consequence, had to decide whether to cut production to maintain prices, or protect market share by abandoning quotas and allowing prices to fall. In November 2014, OPEC decided to pursue the market-share strategy and prices entered a downward-spiral.

The crude oil price finally reached a 12-year low of $26 in February 2016 and continued to fluctuate throughout 2016.

"Keep the price above $50”: Agreements and market initiatives

The OPEC, today is the most famous colluding organizations in the world. Its fundamental goal is to “co-ordinate and unify petroleum policies among member countries, in order to secure fair and stable prices for petroleum producers, an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry” (OPEC 2016). Its general strategy is not fixed; the cartel rather aims to adapt to current market events and conditions. The agreement signed in September aims to address the unstable state of the oil market, by cutting production and end three years of unrestrained production.

As part of its “Goal to keep the price above 50” campaign, it is prompting other countries outside OPEC to do the same. Russia, a powerhouse in its own right in the field of crude oil production, has been sending mixed messages over whether output will be curbed or simply frozen at September’s post-Soviet level. At the same time, OPEC member Iraq sent in a formal request to be exempted from any deal to freeze production as it grapples with supply disruptions due to the Islamic State’s control over some of its oil fields. Similar exemptions have been granted to other member countries Iran, Nigeria and Libya, leaving the outcome of negotiations right now uncertain.

Uncertainties in the agreement: a sudden drop in the oil price

Despite market confidence being heavily influenced by the OPEC agreement, participating countries have conflicting opinions and have been unable to conclude a deal. Following this weekend’s meeting of OPEC and Russia, rising uncertainty of the execution of the agreement lead to a sudden drop in the oil price. In just a matter of three days the oil price slumped to below $50 per barrel.

The current dispute between Saudi Arabia and Iran is prompting other members to request an exemption from the OPEC plan to cut production. In addition, some members are questioning the foundation of the deal, given the weak compliance of production quotas from some members in the past. The details of the plan as regarding to the specific individual member quotas, the base period for these cuts and the exact timing of the implementation, will still have to be agreed on during its meeting on November 30th in Vienna which will be critical for the fate of the deal.

What does this mean for the price of crude oil?

According to the October issue of the World Bank Commodity Markets Outlook the crude oil price per barrel is predicted to rise in both 2016 and 2017. Crude oil prices are projected to average $43 and $55 per barrel in 2016 and in 2017, respectively. In 2017, consumption is expected to finally begin to exceed production, which will eventually help reduce the large inventories accumulated. The forecast also assumes that OPEC will succeed in limiting growth production, and that U.S production will level out.

The future of the stability of the oil market will depend on an effective and rational set of policies. Commodity agreements in general have had limited ability to affect the market and eventually broke down with unintended consequences, apart from OPEC. OPEC's role as the as the main surviving cartel affecting oil production will be therefore fundamental and the execution of the agreement even more crucial.




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