OPEC Not Curbing Output, Oil Prices Falter

Oil prices kicked off the week by sinking towards a seven-year low, and the markets also started in the red. While that’s bad news, the slide in oil prices likely came as little surprise to investors given results from the recent Organization of the Petroleum Exporting Countries (OPEC) meeting.
Brent crude prices were down at $41.38 per barrel, while US crude prices fell to $38.15. For US crude, $38 is a new low for the year and the lowest level seen since 2009. At the same time, Reuters reported that oil futures shed nearly 6 percent, reaching lows not seen in seven years.

OPEC not cutting production

The driving force behind flailing oil prices can be chalked up to oversupply in excess of up to 1.5 million barrels per day, originally caused by the introduction of US shale gas into the market. With a new player on the scene, OPEC members had to fight to retain market share.
Ahead of Friday’s meeting, rumors were circulating that OPEC would be curbing output to help support prices. However, as expected, no decision on cutting production, nor on raising the output ceiling, was reached. Instead, the group confirmed it will be sticking to its current output level. According to Wood Mackenzie, “the group is going to continue its policy of seeking market share and letting the oil prices sort out the winners and losers.”

“The outcome is not a surprise because Saudi Arabia has made it clear since the November 2014 OPEC meeting, that it will not cut its output unless other producers such as Iran, Iraq, and Russia also reduce theirs,” Judy Dane wrote in a research note.
As Dinara Millington, vice-president of research at the Canadian Energy Research Institute, told Radio Canada International, OPEC has historically “acted as a swing producer and has more or less successfully managed the oil market for by capping the amount that it allows to enter the market.
The reason, Millington said, that OPEC has no interest in curbing production output is that it hopes to knock its competition off the map — shale producers “have much higher production costs and can’t stay profitable for long in a cheap oil environment.”
Dane also noted that “it is going to be a long slog until H2 2016 with the oil market facing rising Iranian oil output and continued implied stock builds for H1 2016.”
The Wood Mackenzie analyst did, however, highlight that US oil output has been slipping into a “year-on-year decline late this year,” which could possibly provide a floor for prices as the market deals with the oversupply issue.

Low oil prices could impact markets

Wall Street started the day off in the red, held back by poorly performing energy and raw materials stocks. The Bloomberg Commodity index — a basket of prices for natural resources, from copper to oil and gold — was also down alongside the exchanges. The Calgary Herald reported that the index dropped 1.6 percent, bringing its total decline this year to 23 percent.

The S&P/TSX Composite index (INDEXTSI:OSPTX) also got off to a shaky start this week, taking a 2.37-percent or 315.94-point tumble to 13,042.83 points. That’s the exchange’s biggest drop in two months, and The Globe and Mail reported that “the gauge has declined for two consecutive weeks and has lost more than 10 per cent so far this year.”
As Radio Canada International reported, a further decline in oil prices poses a threat to the recovery of Canada’s fragile economy.
‘The falling oil prices are particularly bad news for the economy of oil-rich Alberta. The province, which had become Canada’s economic engine in the last few years, suffered a recession this year and has seen its unemployment rate spike to 7 per cent from 4.5 per cent at the start of the year,” the news outlet states.
 
Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.
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