For the first 11 months of the year, OPEC talked oil prices up, but by December it became clear that oil prices were not going to rise higher on mere promises, and so OPEC announced a deal to cut production in their Algiers meeting on November 30. Crude oil promptly responded by rallying 12% since the announcement of the deal.
Adding to the OPEC production cut of 1.2 million barrels a day, non-OPEC nations verbally agreed to pitch in, proposing a cut of 600,000 bpd. The total reduction achieved on paper was 1.8 million barrels a day.
However, the $52-a-barrel mark for WTI has become an important level. Once it hits $52, the market starts worrying about the fundamentals. This time, it is no different.
OPEC, while agreeing to cut production, has in the past shown questionable commitments to its agreements, which puts a question mark on the implementation of the agreed production cut.
In November, as the meeting was underway for solidifying the details of the production cut, OPEC members back home were busy pumping oil at record levels, reaching a record output of 34.19 million bpd. Similarly, Russia, which has been vocal in support of the production freeze also increased production to 11.21 million bpd, nearly a 30-year high.
Second, Saudi Arabia, which has to do most of the production cutting, has cut its January price for the Arab Light grade for Asian customers by $1.20 versus December, reports CNBC. This shows that Saudi Arabia is worried about its market share, and cutting production is going to make it more difficult to retain its market share.
So when it comes to implementation, big question marks remain.
"Adherence to assigned OPEC quotas is apt to be limited and enforcement of such nearly impossible," Jim Ritterbusch, president of Chicago-based energy advisory firm Ritterbusch & Associates, said in a note, reports CNBC.
The U.S. shale oil producers are also a serious threat. They have added 161 oil rigs in 24 of the past 27 weeks, taking the count to 477, highest since January. OPEC will not want to unleash the beast once again, which is now leaner and more competitive than ever.
OPEC is not keen on giving the U.S. shale oil producers an opportunity to increase oil production and thereby increase their market share, exporting to new and existing markets, while OPEC is busy cutting production.
RBN Energy President Rusty Braziel said: “the sweet spot for OPEC is to have crude prices between $55 and $58 a barrel. They want the extra money, but do not want to create the economics to have the U.S. increase production by 100,000 barrels a day,” as quoted by CNBC.
With its current deal, OPEC ensured only that there is a floor under oil prices, instead of aiming for higher oil prices closer to $60 a barrel.
What does the crude oil chart forecast?
Crude oil has made a nice ascending triangle pattern. If the price breaks out of the $52 levels and sustains the breakout, it gives an upside pattern target of $67. However, the markets have rejected the levels above $52 on December 5, but we should see one more attempt at a breakout above the highs.
A breakout may see the oil rally to $54 a barrel, where it should again find some resistance. $60 in 2016 looks unlikely.
By Rakesh Upadyay for Oilprice.com
