Oil prices remain volatile after OPEC’s meeting

18266036015 65585e454d zOPEC’s agreement on continued production cut is aimed to stabilise oil supply in long run. (Image source: Philippa McKinlay/Flickr)After the agreement of nine-month oil production cut in OPEC meeting in Vienna on 25 May 2017, aimed at boosting the oil price and stabilising the market, industry experts anticipated that oil price would remain volatile with US showing another surge in oil production

Prior to the meeting, Nizam Hamid, head of strategy in Europe at WisdomTree, remarked that after the first-time production cut in Novemebr 2016, the price of Brent crude boosted almost 30 per cent. According to him, a further decision to cut oil production would result in increasing oil price in near term.

“Recent moves suggest that the oil price will remain volatile in the run up to OPEC’s meeting, driven by shifts in sentiment towards further cuts. In terms of the scale of the recovery in the price, a positive meeting could see oil maintain a trading range of between US$50-55, while any weakness or lack of conviction could see oil fall close to US$40,” he added.

Sam Wahab, director of oil and gas research at Cantor Fitzgerald Europe, anticipated that a further cut in oil production in OPEC meeting would conceivably hit oil price to US$60/bbl at the end of the year.

Hamid said, “The key players are Saudi Arabia and Russia, and the message seems to be based on keeping output lower for longer and into 2018, thereby stabilising the market. However, such a commitment is a fine balancing act as it needs to reflect any potential surge in US production.”

Wahab and Hamid agreed that due to production surge in US shale industry, and further nine oil rigs being added to bring the total count up to 712 in the US, US might replace production supply cut from Saudi and Russia, with oil price remaining volatile in recent weeks.

After OPEC has decided to a further nine-month production cut, Michael Burns, oil and gas partner at Ashurst, commented, “The key question is, once again, how US shale producers respond to any price increase. They are operationally relatively flexible and ready to take advantage of higher prices."

“The agreement to extend the agreed cuts by nine months was expected but its effect on oil price may be offset by US shale oil production growth,” said Yann Alix, resources and utilities partner at Ashurst.

"Other elements to consider are the renewed political instability in the Middle East, including within the Gulf Cooperation Council, and its potential impact on the OPEC deal, as well as the effect of the US withdrawal from the Paris climate agreement and, more generally, Trump Administration's energy policy," he added.

The news this week that Saudi Arabia, Bahrain, the UAE and Egypt have cut ties with Qatar contributed to an oil price drop, but it remains to be seen how this developing situation will affect prices in the medium- to long-term.

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