Dimming OPEC Output Margin Prospects Causes Oil Prices to Drop

The oil prices slipped to one week low, as a result of diminishing prospects of OPEC and non-OPEC ministers to deliver incremented cut, who met to discuss the pact to curb oil output.

While the oil price fell 2.5 percent on Friday as a result of a consultancy’s forecast regarding the rise in OPEC production in the month of July, Brent September crude futures fell 18 cents on the day to end at US$47.88 a barrel at 0850 GMT. On the other hand, NYMEX crude for September delivery lost 20 cents to end at a barrel price of US$45.57.

Non-OPEC Countries Opening New Opportunities
In a few days, a number of leaders from the OPEC and other non-OPEC producers are to meet at St Petersburg in Russia, slotted to review the current situation of the market and analyze any proposals pertaining to their pact to cut output.

While Saudi Energy Minister Khalid al-Falih has made it clear that there will be no discussion on deeper oil output cuts, he is open for a discussion on output caps for non-OPEC countries including Libya and Nigeria.

Until now, Libya and Nigeria have been exempted from the cuts in order for their industries to recover from decades of civil war. That being said, several analysts strongly doubt that OPEC will take such a considerate decision, and that there simply is no hope for output cuts from Libya and Nigeria after the misery they have gone through in the recent past.

OPEC’s Ability to Rebalance Oil Market Still in Doubt

The Organization of the Petroleum Exporting Countries (OPEC) was founded in 1960 and now has 13 members as of 2017, but their ability to control the volatility of oil prices has never quite died down. On Tuesday, oil prices rose, but the market remained fragile with concerns coming from increasing U.S. crude output and decreasing demand for oil owing to preference of alternative energy that are environment friendly.

Demand for Crude Continues to Fall
Monthly reports on supply and demand from OPEC and this week’s U.S. data on crude production highlights that global crude inventories continue to fall and unless the wavering demand growth does not increment, the pattern will continue. The U.S. gasoline stocks are strong and the trend of electric vehicles is growing. In addition to that, U.S. output has grown about 10% since mid-2016 and is closing in on the output of Saudi Arabia and Russia. These are some of the factors resulting in reduced demand from a highly profitable market, hitting its lowest mark in last three years. Drop in commodity imports and weakening manufacturing activity in China is another restraint impacting the demand for crude oil.

Real Challenge to Drive Stockpiles Down Persists
According to the chief market strategist at futures brokerage AxiTrader, Greg McKenna, the biggest challenge for OPEC is to reduce the crude oil stockpiles to a level from where it sustainably rises. However, the falling demand this year is eating into the refining margins. In the physical market, barrels of North Sea crude were available at their lowest cost since 2015. Any efforts by OPEC to rebalance the market can only see the day of light if the oversupply is curtailed, which has not been the case for over two years.