Oil has been the major talking point of the week, with OPEC production cuts helping to push the commodity to two-year highs on Wednesday 1 November, writes FXTM’s Global Head of Currency Strategy and Market Research, Jameel Ahmad.
Oil has been steadily recovering over the last quarter. Prices gained 7% in October, the fourth month of consecutive gains for the commodity. Crude demand outstripped supply and it looks like OPEC’s production cuts are finally making an impact on the markets. With the cartel scheduled to meet again at the end of November – a year since the restrictions were agreed on — speculation is rising that members will extend cuts beyond the March 2018 deadline.
Compliance with the pledge is now at an all-time high, reaching 92% in October; a 6% increase on September’s figure. This, coupled with a drop in exports from Northern Iraq, saw OPEC output decrease by 80,000 barrels in October, taking barrels per day to 32.78 million last month. While market sentiment towards oil is turning increasingly bullish, doubts remain as to whether the rally will continue. There are still a number of issues OPEC needs to address.
Libya and Nigeria are both exempt from cuts, but rising production from both nations this year has hindered the cartel’s efforts to rebalance the markets. There is speculation that OPEC will use November’s meeting to request that both join the production deal. Nigeria is on record saying it has now effectively capped production – at what level is still debatable. Libya’s compliance with production cuts could be tricky, internal disputes (although now resolved) have kept a significant number of barrels offline. In addition, a lack of capital investment in the state-run oil company is thought to have limited potential output by 6 million barrels, from July to September. Until the country is in a position to achieve full capacity (1.6 million bpd), OPEC may hesitate to impose restrictions.
While the overall goal of the cartel is to cut production, rising oil prices could tempt producers to bring more barrels online. US Shale output has already soared over 10% this year, and any further increase in output will seriously jeopardize OPEC’s efforts to address the supply glut. Non-members are not the only ones who could be influenced by a price rally, and OPEC producers may find their resolve to comply with current restrictions sorely tested.
And let’s not forget, we are still waiting for OPEC’s promised “extraordinary measures” to materialise. Could this be a hint that a collaboration between OPEC and US Shale is on the cards? The markets will be paying close attention to OPEC developments as the meeting in Vienna draws closer.
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