Complex Made Simple

Can OPEC’s December meeting stall the oil price plunge?

Oil markets are still scratching their heads over the recent oil price slide as petrol companies lose billions in values.

Despite an expectation of OPEC-led cuts, Brent and WTI prices have slumped by 28% and 30% respectively since early October.

The global oil and gas sector has lost $1 trillion in value over a 40-day period since October after crude prices fell by about $20 per barrel, reports

ExxonMobil, for instance, lost $35 billion in value.

Some analysts are warning that OPEC and non-OPEC producers (OPEC+) will need to cut output to balance the market.

“If they don’t cut, I guarantee you it’s going to be 2014 all over again,” Mike Bradley, managing director at the energy investment firm Tudor, Pickering, Holt & Co., told the Houston Chronicle.

Crude oil prices fell sharply Q4 of 2014 as robust global production exceeded demand. From June $112 levels, Brent crude oil benchmarks fell to $62 per barrel.

Why are oil prices so low?

Read: How low could oil go? Could Brent crude limp to $60?

Several factors at play

Oil bounced by around $1 a barrel on Wednesday, following the previous day’s 6% plunge.

Brent crude oil futures were at $63.60 per barrel, up $1.07 per barrel, or 1.7% from their last close, while West Texas Intermediate (WTI) crude futures, were up $1.03 cents, or 1.9%, at $54.46 a barrel.

CNBC reports that Wednesday’s rebound came after a report by the American Petroleum Institute late on Tuesday that U.S. commercial crude inventories last week fell unexpectedly by 1.5 million barrels, to 439.2 million, in the week to Nov. 16.

Record crude imports by India of almost 5 million barrels per day (bpd) also supported prices.

Investors remained on edge, with the International Energy Agency (IEA) warning of unprecedented uncertainty in oil markets due to a difficult economic environment and political risk.

“The name of the game in the oil market is volatility,” IEA executive director Fatih Birol said at a conference in Oslo. “And with the increasing pressure of geopolitics on oil markets that we are seeing, we believe that we are entering an unprecedented period of uncertainty.”

“The global economy is still going through a very difficult time and is very fragile.”

Read: Talks of oil cuts are back already? Here’s why

S&P Global Platts Analytics projects US crude production to average 10.8 million bpd in 2018, 11.6 million bpd in 2019 and 12.3 million bpd in 2020.

All of this volume has to go somewhere.

US crude exports, excluding to Canada, are expected to rise to 2.2 million bpd in 2019 and 3.9 million bpd in 2020.

US investment bank Goldman Sachs said on Wednesday the renewed price collapse reflected “concerns over excess supply in 2019… (and) a broader cross-commodity and cross-asset sell-off as growth concerns continue to mount.”

With output surging and the demand outlook deteriorating, the Organization of the Petroleum Exporting Countries (OPEC) is pushing for a supply cut of between 1 million and 1.4 million bpd to prevent a repeat of the 2014 glut, according to CNBC.

“We would anticipate further weakness until the reaction from OPEC+ (Dec. 6) and the G20 summit is clearer (Nov. 30/Dec. 1),” said Ashley Kelty, oil analyst at investment bank Cantor Fitzgerald Europe.

Major oil-producing countries in the Middle East will add 2.7 million bpd of capacity through 2025, according to Rystad Energy. Iraq will add the most at 1.5 million bpd, and an additional 1.2 million bpd will come from the UAE, Iran, and the Neutral Zone between Saudi Arabia and Kuwait.

Read: ADNOC announces $132 Billion CAPEX Program, 4 million bpd by 2020

Ineffective Iran sanctions

According to the New York Times (NYT), Trump’s decision to reimpose sanctions on Iran threatened to take a large amount of oil from one of the biggest producers off the market, prompting OPEC and Saudi to increase output.

Saudi increased output by almost 700,000 barrels a day compared with their average output in 2017.

“The sanctions have had less effect on Iranian output than some analysts had predicted. OPEC reported that Iranian production in October was down 4.5% from the previous month, to about 3.3 million barrels a day, and the Trump administration granted temporary waivers to Iran’s largest customers, including China, India, and Japan,” said NYT.

James Mick, energy portfolio manager with U.S. investment firm Tortoise, said: “…part of the supply issue has been surging U.S. production.”

“US crude oil production has jumped by almost a quarter this year, to a record 11.7 million bpd largely because of a surge in shale output,” said NYT.

Read: Oil futures panic sell offs, plunging financial markets, quiet bulls

What’s next?

The bull market has now fully unwound after hedge funds and other money managers have sold off all the bullish positions they had accumulated since the second half of 2017, according to Reuters, as reported by

The last seven weeks have seen the largest liquidation of long positions since 2013. Long positions are now at their lowest level since January 2016 – a period of time that coincided with the very bottom of the oil market cycle.

“Fund managers now have a roughly neutral position towards the market,” said