Can Oil Prices Continue Upward Trend? – OpEd


One of the questions haunting exploration and production (E&P) companies is how soon and how much will oil prices rise by end of this year? The reply is simple, any hike in price is dependent on how much output producers are willing to relinquish.

Therefore, the first point to explore is who will take the lead in cutting output.

The western media is still keeping the hype that Saudi Arabia has to cut its output, but the biggest stumbling blocks are Iran and Iraq. The media continues to spread disinformation that since Saudi Arabia and Iran continue to be the worst of foes, any reduction in output by Saudi Arabia remains a remote possibility.

According to a Reuters report, “Oil rose to a one-year high on optimism regarding a future agreement between OPEC and major producers to restrict output.”

The report also said, “Significant doubts whether they (production cut targets) will actually be fulfilled as rivalry between OPEC members, who are fighting aggressively for global markets share, could prevent an effective deal.”

As per a report by Goldman Sachs to clients on Tuesday that despite a production cut becoming a “greater possibility”, markets were unlikely to rebalance in 2017. The rationale was, “Higher production from Libya, Nigeria and Iraq are reducing the odds of such a deal rebalancing the oil market in 2017 and even if OPEC producers and Russia implemented strict cuts, higher prices would allow U.S. shale drillers to raise output.”

Initially, I held the point of view that most of the shale oil producers were unable to continue production below US$50 barrel due to accumulated losses. Now, however, I believe that they have withstood the test, which is evident from the persistent increase in number of active rigs. However, the number of operating rigs is still less than 25% of total installed rigs.

The moral of the story is that shale oil producers are more anxiously awaiting a hike in price, but out of desperation they want to increase the number of operating rigs and snatch the Saudi share as early as possible. They have invested billions of dollars on the hope that the oil price would not fall below US$50/barrel. The crash that began in 2014 has shattered their dreams.

Even geopolitical turmoil in MENA has failed in deterring OPEC members, mostly located in the region where proxy wars have been going on for more than last two years.

Shabbir H. Kazmi

Shabbir H. Kazmi is an economic analyst from Pakistan. He has been writing for local and foreign publications for about quarter of a century. He maintains the blog ‘Geo Politics in South Asia and MENA’. He can be contacted at [email protected]

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