Stability in Oil Price Attributable to Coordinated Action by OPEC, But Will U.S. Shale Spoil the Party?

With Brent oil hovering around $55 for the past two months, actions by OPEC and non-OPEC members to keep 900,000 barrels per day off the market have had a stabilizing effect on prices, Riyadh-based Jadwa Investment said in a note released to investors.

But despite the stable start to the year, Jadwa sees a likely return of price volatility as international oil markets face up to a rising risk of OPEC noncompliance to production cuts, upward revisions in US oil production, and policy initiatives from the new US administration, Jadwa said.

“The new US administration has gone about bringing wholesale changes to the oil sector. While an executive order was signed to build/expand two oil pipelines, there is also the potential of border taxes being applied to imported crude oil and the risk of sanctions being reapplied to Iran,” Jadwa notes. “Meanwhile, according to preliminary full year 2016 data, weaker economic growth, higher energy prices, and larger gas supplies led to slower growth in the Kingdom’s domestic consumption of crude oil and refined products,” Jadwa said.

A report today in Reuters said that OPEC could extend its oil supply-reduction pact with non-members or even apply deeper cuts from July if global crude inventories fail to drop to a targeted level.

Oil prices have stabilized at the start of 2017.

Oil prices have stabilized at the start of 2017.

Citing OPEC sources, the report said that producing countries must comply 100 percent with the supply accord and growth in demand for crude will have to stay healthy for prices to climb.

“If we have full commitment by everybody, inventories will go down. By sometime in the middle of this year, maybe they will go near the five-year average. But that’s if you have 100 percent compliance,” one OPEC source told Reuters.

But whether OPEC succeeds in its goal of stabilizing the oil market and preventing another slump in prices may be out of the cartel’s hands. With oil prices having risen close to 20 percent since OPEC finalized its cut agreement, U.S. producers have been busy putting rigs back in action, according to The Hill. 

[Click here to read the full report from Jadwa Investment] [In Arabic]