The price of oil has taken a severe tumble in recent weeks. As we enter the last month of Q2 with a maelstrom of external pressures flying around the oil industry, many are looking towards the OPEC summit on June 22nd for clarification on the future of the commodity.
In the past week, a consultative group involving several energy ministers from Saudi Arabia, UAE, Kuwait, Algeria and Oman met to discuss the current and future direction of oil production. The meeting, while informal and under-the-radar, was revealed to be about “sustaining the current partnership in order to continuously adapt to ongoing market dynamics in pursuit of the interests of consumers and producers.”
The tight-lipped behavior of the OPEC ministers is understandable in light of the latest price developments: The current rally in crude oil prices has seen an increase of 15% since the start of April 2018, off the recent lows of around $55.
SAUDI ARABIA AND RUSSIA HIT EXCESS OIL PRODUCTION
With the announcement of increasing oil production by Saudi Arabia and Russia, last week oil prices plunged from three-and-a-half-year highs. The supposed increase may see up to 1 million bpd to the current supply, in order to offset a deteriorating Venezuelan economy and the potential throttling of Iranian oil supply due to the return of US sanctions. Many analysts don’t think the group would add the reported 1 million bpd of supply, but the oil market lapped up the news and concerns about a return to a surplus have dominated the OPEC news flow. Even with the possible increase of production in the future, the present is no different. Both Saudi Arabia and Russia have been producing above the agreed quota for several months. Saudi Arabian oil exports jumped to 7.08mb/d, a six-month-high. Russian oil production has also been excessive, hitting 10.97mb/d throughout the month of May, which is above the quota agreed to for the third consecutive month.
The US has also been guilty of increasing output, with another consecutive record set for production levels, as well as the opening of two new drilling operations. “The continuing increase in crude oil production is weighing on the market, and quite significantly compared to this time last year,” said Andrew Lipow, president of Houston-based Lipow Oil Associates. US oil production is up 1.5 million bpd from a year ago.
THE MARKET SENTIMENT REMAINS BULLISH
Despite the pullback in price, the overall market for crude oil remains bullish. The overall rise in basic energy commodities is supported by the rally in the stock market, where energy stocks are leading a push for higher prices. This positive sentiment is confirmed by the price of energy stocks in the S&P basket. These stocks normally lead any market rally or decline, and the current trend is bullish. With energy stocks currently approaching their 52-week highs, the outlook is cautiously good.
As the June 22 meeting draws closer, oil prices will likely react to any new bit of information, comments, or reports about OPEC’s efforts to clarify the situation. Consumer anxiety will likely not be eased until the meeting has concluded and there is further knowledge of future plans of OPEC.