OPEC might need to resort to drastic measures to keep oil from slipping below $40

July 11, 2017 – Right now the production cuts that OPEC recently agreed to extend are not working. Prices of crude oil have fallen into the mid-forty dollars a barrel range and are threatening to drop lower.

In a report released on Monday by Goldman Sachs Group Inc., the firm stated, “OPEC needs to ‘shock and awe’ the oil market for prices to gain. The Organization of Petroleum Exporting Countries must increase output cuts aimed at shrinking a global glut with little public announcement in order to jolt investors.”

Goldman Sachs analysts, Damien Courvalin and Jeffrey Currie, also added in the report, “Without such action and no evidence of sustained declines in inventories as well as U.S. drilling activity, prices could slump below $40 a barrel.”

Industry experts fear that OPEC will not be able to effectively moderate global oil production in order to ease the global oversupply.

Last month, the French company Kpler reported that floating oil storage was at a record high at 111.9 million barrels.

The senior director for Boston Consulting Group’s Center for Energy Impact, Jamie Webster added, “That was the last thing traders wanted to hear. Since floating oil storage is typically more expensive than other methods, the stocks it holds should be the last to increase and the first to shrink.”

American oil producers added to the total number of working rigs last week, which will further increase the U.S.’s oil output that rose throughout June. Nigeria and Libya further exacerbate the issue because they are exempt from the OPEC production cuts. Both countries increased their oil production outputs in June.

Analysts believe that the supply glut and a bearish market could push prices of crude oil towards the $30 per barrel range.

“Given that the market is now out of patience for large stock draws and increasingly concerned about next year’s balances, we believe that price upside will need to be front-end driven, coming from observable near-term physical tightness and signs of a U.S. shale activity slowdown on a sustained basis in coming weeks,” the report from Goldman Sachs added.

OPEC’s Secretary-General Mohammad Barkindo says that deeper production cuts are not on the table, but there is a July 24 meeting in St. Petersburg, Russia. Nigeria and Libya are invited to the meeting, and Kuwait’s oil minister, Issam Almarzooq confirms that discussing the stability of the two-exempt nation’s oil production is priority.

The Goldman Sachs analysts commented on the planned meeting, “While OPEC has yet to address this increase in production, the group has invited both countries to participated in the next compliance committee. We continue to believe that there is another opportunity for OPEC to increase the cuts, but that this should be done in a ‘shock and awe’ manner, with little public announcement.”

Whether or not OPEC does push for more cuts, something needs to be done to help keep the prices of crude oil from falling further.

Article written by HEI contributor Raymond Arrasmith.

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