Will Russia Be the First to Break OPEC’s Oil Supply Cuts?

There’s been a lot of news about the price of oil lately. Some analysts are even forecasting a return to US$100 per barrel.

Our own analysis indicates oil is close to topping out and getting ready to head lower. Although it will likely take a few months to reverse direction.

On the commodities markets, West Texas Intermediate crude oil is US$70.60 per barrel. Brent crude is US$77.50 per barrel.

That puts WTI down 0.20% overnight. But crude is still trading at its highest levels since 2014. And the upward trend, as you can see in the chart below, remains intact.

West Texas Intermediate Oil prices per barrel

Source: Bloomberg

While the chart above is admittedly bullish, we believe oil doesn’t have much further to run, and is likely to fall back below US$60 per barrel before the end of the northern summer.

Part of the price pressure has been strong global demand. And that’s likely to remain in the year ahead.

But the other factors driving the oil price higher may well disappear a lot faster than the oil bulls expect.

First, the market’s had jitters about Venezuela and Iran, both major oil producers.

Venezuela is on the brink of political collapse.

And Iran’s oil exports may be greatly cut back due to renewed US sanctions, imposed by Trump after pulling out of the nuclear agreement.

These are valid reasons for concern. But any output collapse from Venezuela is likely to be short lived…months rather than years.

The situation with Iran is harder to predict.

There are reasons to be optimistic

North Korea, for example, is likely to enjoy massive US led benefits for verifiably dismantling its nuclear weapons facilities. And as we’ve written before, we believe this will also happen far faster than most political pundits can imagine.

When the Iranians see how much North Korea gains by giving up its nukes, they’ll have a lot of incentive to sit back down and renegotiate the nuclear agreement. An agreement even its most fervent European supporters admit is highly flawed.

But even if Iran remains obstinate — and its oil remains largely off the market — there are plenty of other nations able to take up the slack.

Oil output in the US, for example, is at record highs and continues to ramp up. The Baker Hughes US rig count is now at a three-year high. And at the current prices, that rig count should continue to grow.

Then there’s the matter of OPEC. The organisation’s 2017 output cuts have managed to successfully push prices higher. But the agreement only runs to the end of 2018. At US$70 per barrel, it’s unlikely all the member states will agree to extend that commitment into 2019.

Already some members have said they might increase production before the end of the year. Like Russia.

As CNBC reported on 20 April:

Russia may not support the ongoing oil supply-cutting deal led by OPEC until the end of the year, Russian Energy Minister Alexander Novak told CNBC…

“I cannot at the moment give you a precise answer because we do not have the full idea how the market is going to perform in the forthcoming months. We need to carry on monitoring the situation,” Novak told CNBC’s Steve Sedgwick in Jeddah.

“I cannot tell unequivocally: yes or no, this would be too blunt.”

OPEC’s next meeting to discuss the oil deal takes place in Vienna on 22 June. That could prove a key turning point.

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Bernd Struben

Bernd Struben

Bernd Struben is the lead editor at The Australian Tribune. Bernd makes use of his extensive network to bring you the top stories you need to know about each day. Stories the mainstream may miss. Or bury somewhere you’re unlikely to ever read them. Bernd studied aerospace engineering and journalism at the University of Michigan, before graduating with a degree in economics. Over the past two decades he’s worked in media, management, and finance in the US, the Caribbean, Europe, and Australia. His other role, as the editor of the Port Phillip Insider, puts him in a unique position to read Australia’s most exclusive financial advice. Some of which he shares with readers of The Australian Tribune for free.
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