West Texas Intermediate crude settled up 41 cents on Friday at $48.24/bbl, ending the month of September up roughly 8%. Most of the increase came from late last week’s OPEC meeting, which resulted in a plan to cut production. As mentioned in prior posts, OPEC agreed on Wednesday to cut output to somewhere between 32.5-33.0 million bbls/day from its current levels, which are around 33.6 million bbls/day, all in the hopes of raising the price of crude oil. This agreement, which was actually OPEC’s first decision to freeze output since 2008, was accompanied by the notion that individual quotas and implementation data for each OPEC member would be finalized at the next OPEC meeting in November.
Will it work? Even if OPEC follows through with this plan (historically members talk the talk but fall short of walking the walk) many believe that the anticipated/vital price increase will not happen. Fundamentally, the hefty supply glut has put extreme downward pressure on the price of crude and an OPEC production cut may have little significance. Additionally, with three months left in the year, Iraq and Iran are both producing crude at alarmingly high levels, and in recent years producers such as Indonesia and Gabon have joined the OPEC production party, adding to the global supply overhang.
According to Reuters.com, supply in October will more than likely rise. Iraqi’s Kirkuk oilfield is exporting crude once more, three previously blockaded ports in Libya have been opened, Iran is almost back to producing at pre-sanction levels, attacks on Nigerian crude infrastructure have ceased, recent record-hitting Russia has opened one new oil field and plans to open another later this year, and the U.S. has seen 13 out of 14 weeks of increased oil rig counts. Between now and the November OPEC meeting, crude prices are in for one hell of a ride, especially if Russia, a non-OPEC producer, continues to increase production and is not willing to join the party.
Thanks to PVMreports.com for charting what each member of OPEC would need to cut in order to achieve the desired amounts agreed upon. See below for the table.
As of post time, WTI crude is up 30 cents to $48.54, RBOB is up 15 points, and ULSD is up 85 points.