Oil Price Drop Shows OPEC Deal Was ‘Much Ado About Nothing’
The oil price recovery that was supposed to follow OPEC’s agreement to curtail production late last fall has pretty much evaporated, Bloomberg Markets reports this week, with oil and gas prices at their lowest since late November and oil stocks taking a hit as a result.
“Evidence is mounting that the OPEC agreement, and the market’s reaction, were much ado about nothing,” Again Capital LLC Partner John Kilduff; told Bloomberg.
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“You can only do so much with supply,” added Mark Watkins, regional investment manager with the Private Client Group at U.S. Bank. “We need to see demand increase as well. China might be hitting a speed bump, which makes it hard to be positive about demand.”
While OPEC is likely to extend its production cuts at a meeting in Vienna May 25, and Russia is expected to support the cartel’s effort, Bloomberg notes that U.S. shale oil production is at its highest level since August 2015. The net result: Benchmark West Texas Intermediate (WTI) crude oil is down to US$45.52 per barrel, while Brent crude stands at $48.38.
Not all analysts agree that the OPEC production deal has failed.
“The market appears to have temporarily lost faith in ever seeing an impact of the OPEC cuts on inventories,” said Michael Cohen, Barclays Plc head of energy commodities research. “We disagree and think that OPEC will manage to extend the cuts, and we’ll see inventories fall in the second half of the year.” A reduction in the oil supply backlog would trigger an increase in prices.
Bloomberg cites gasoline demand as a factor that would affect the supply backlog—but doesn’t have good news for fossil producers. At 9.22 million barrels per day for the first four weeks in April, according to the U.S. Energy Information Administration, gasoline demand was down 2.7% from the same month in 2016, and fractionally from March 2017.
“Yesterday’s report showed that U.S. gasoline demand is pretty weak,” said Mike Wittner, head of commodities research at Société Générale SA in New York. “This is really starting to weigh on crude.”