Are oil prices on the boil again?
For oil prices to increase consistently hereon, the market needs substantial production cuts, and—in that sense—the 6-7 December Opec meeting is crucial
On 3 October, Brent crude prices had touched a high of $86 a barrel. But that strength did not sustain. In less than two months, prices dropped by about one-third. But thanks to the convergence of multiple events, Brent crude prices increased by 5.3% in intraday trading on Monday; although they gave up some of the gains to record a net increase of 3.8% to $61.7 a barrel at press time. Should this sudden increase in prices ignite hopes of a rebound in Brent crude prices?
Much will depend on what the Organization of the Petroleum Exporting Countries (Opec), and its friends, decide at its meetings on 6-7 December. For oil prices to increase consistently hereon, the market needs substantial production cuts. Of course, investors are widely expecting Opec and friends to cut production.
But according to Madhavi Mehta, assistant vice president (research) at Kotak Commodity Services Ltd, the production cuts have to be significant this time for oil prices to bounce back meaningfully. For instance, if the production cuts are to the tune of one million barrels per day (mbpd), outlook for prices may not improve substantially, she added. This is because in June, Opec and its friends had opened their taps to the extent of one mbpd.
The optimism in crude oil prices on Monday wasn’t, however, just due to the expectations of production cuts from Opec and its allies. China and the US have agreed to put tariff hikes on hold for now. In general, that added to the risks on sentiment in the market, say analysts.
Further, Alberta, a province in Canada, which is the world’s fifth largest crude oil producer, decided to cut output starting January, to deal with the supply glut and lower prices.
But how consequential is Alberta’s 325,000 barrels a day cut for the oil markets?
“Even though Canada is major producer, the current production cuts are not enough to lead to a major price rally,” said Kotak’s Mehta. It appears investors perceive the oil markets as interventionists these days and that relief is around the corner, she added. What this means is that investors hope that producers will decide to cut output when prices are lower and increase production when prices are high.
It goes without saying that lack of meaningful production cuts in the forthcoming Opec meetings will make a case for lower crude oil prices. For India, there is still immense comfort from the fact that oil prices are much lower than the $85 a barrel seen in October. To that extent, lower prices benefit the country’s current account deficit and ease the pressure on the rupee. Likewise, for many companies, lower crude oil prices will bring some relief on the cost front.