America's LargestOPEC Quietly Meeting Production Cut Targets
OPEC Headquarters in Vienna, Austria Image: slate.com
The past two weeks have been turbulent ones for world oil markets. Israel’s attacks on Hamas in Gaza dominated oil-related news for several days, stoking fears of the conflict sparking supply disruption in the Middle East, and helping to drive crude prices to a one-month high of just over $50 a barrel on January 6th. The much publicized fight between Russia and Ukraine over natural gas prices that led to the cutoff of Russian gas supplies to over a dozen European nations began competing with the Gaza conflict for headlines at the start of the new year. Traders focused on the unreliability of Russia as an energy exporter, and visions of Russia withholding oil for political reasons in a theoretical future contributed to rising crude prices as well.
Amid the geopolitical turmoil, OPEC member states were announcing reduced production levels and smaller exports to their biggest customers. As a November 28th HEAT Zone post discussed, consistent, demonstrable cuts to meet agreed-upon production levels have been an elusive goal for the group for as long as it has been in existence. Perhaps it was the rapid pace at which the price of oil dropped this fall that motivated a true show of unity within the group, as even the lesser-producing member states realized that reducing output immediately was essential to their long-term solvency on the oil market.
Two Wall Street Journal blogs, posted today and last Wednesday, took note of the OPEC cuts and mused on their possible effects on the price of oil. The consensus appears to be that, as OPEC cuts continue, the reduced supply is on a collision course with resurgent demand. When the global economic situation improves (which will hopefully be sooner rather than later), demand for oil will pick back up, only to find the world’s supply to be painfully inadequate. It is at that moment that prices will shoot up, and could reach $100 a barrel once again.
When that moment will arrive is what nobody knows. It could be three months, nine months, or two years from now, but it will most certainly come. If OPEC supply cuts continue on schedule, they will eventually succeed in placing a floor under crude prices and setting up the market for an oil bonanza somewhere down the line.
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