10:15 20 July

Decreasing production, increasing price: will the oil price stabilize? - ANALYSIS

Developments in the oil market are not enough for balance

More than a week has passed since the meeting of OPEC Monitoring Committee on output cut. It had been stated in the meeting that the agreement reached in December 2016 is fully being realized. Even Iran also remained loyal to the agreement and kept the production stable. The main goal of agreement is to balance the demand and supply in the market and achieve increase of oil price. In other words, OPEC and 11 non-OPEC countries want to decline the oil supply in the market.


If we research the impact of the statements on the oil market, this impact was unanimously positive:



As is seen, the price has been changeable till March 27 and no tendency of growth was observed. However, after the meeting, oil price started to increase. Consequently, the oil price has gone up $3.65 or 7.2% since March 27. This was occurred within a period less than week. Currently, the oil price makes up $54.5 a barrel and this price is not considered optimal yet. Optimal price is considered $60. Of course, the “considered” is very subjective, because, we mean those intending to sell the oil at expensive oil and sometimes demonstrating radical position, such as Iran. More liberal position is that current level of oil price is more acceptable than decline.


Output cut leads to decline of supply in the market. As a result of this, oil reserves decrease in the world. But, what does mean the decline of reserves on the background of output cut? It means that the demand for oil in the world does not fall and this factor is one of main points for increase in the oil market. For example, if oil output is reduced but the reserves remain stable or increased, so, demand for oil is at low level and even the production exceeds demand after output cut. However, reverse effect was achieved and this directly influenced the oil price rise.    



Recently, oil markets are strongly affected by dynamics of US oil reserves. For instance, it was revealed in the week of meeting that US oil reserves increased 5 million barrels, instead of forecasted 2.8 million barrels, to 533 million, up 50 million barrels or 10.4% from early 2017. If an information on decline of US oil reserves had been spread, the oil price would rise rapidly.   


A simple fact shows the impact of the US oil reserves on oil market – unexpected statistics on US oil reserves was released last week that the oil reserves has not declined, on the contrary, they increased 1.6 million barrels. This immediately affected the oil price and the prices went down.  On March 6, the quotations fell to $54.


We should mention the OPEC Secretary General’s position. He noted that the oil market is still far from balance. This fact and unexpected growth tendencies about US reserves may make OPEC extend the agreement by six months. If the oil price falls below current level, US oil sector causes threat to prices (which is already seen), OPEC will have to take measures and probably extend the period of the agreement.


Vahab Rzayev, APA Analytical Center



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