Oil prices will stay low for a long time yet

published 11 November 2016

Opec stands for the Organisation of Petroleum Exporting Countries, but investors are now calling it the Organisation of Producers Exempt from Cuts, as Petromatrix's Olivier Jakob puts it. At a meeting in Algiers a few weeks ago, Opec which pumps 40% of the world's oil said it wanted to reduce production to help mop up the global glut and shore up the low prices that had become a major strain on producers' budgets; Saudi Arabia has had to issue its first international bond to top up its coffers. Talk of cuts marked a U-turn after two years of deliberately flooding the markets to put US shale producers out of business.

Oil bounced by around 15% in the weeks after the announcement, but it has now slid back to a three-month low of around $45 a barrel losing almost 10% in a week as a deal seems less likely. For starters, Iran and Iraq made it clear they had no intention of reining in output. No wonder, says Chris Helman on Forbes.com; Iraq "needs all the revenue it can generate to fend off Islamic State and repair its broken country". Iran is keen to regain market share, now that it is no longer frozen out of the international system by Western sanctions.

Tehran will reportedly contemplate a cap only when it hits 12% of Opec output the level before sanctions were imposed. That implies 4.2mbpd (million barrels per day) compared with reported production of 3.85mbpd in September. The fewer Opec countries that join Saudi in making cuts, the more the burden of reduced oil revenues weighs on the Gulf kingdom. In frustration, the Saudis have threatened to boost output further from 10.5mbpd to around 12mbpd to put their rivals under pressure by lowering prices, according to Reuters.com. Saudi Arabia has denied threatening Iran.

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US exploration has also increased, thanks to recent price rises in conjunction with cost-cutting and efficiency gains at fracking firms. A total of 569 drilling rigs were active last week, up from 404 in May. Each rig is "adding more than four times as much oil to the market in the same time period as five years ago". If Opec can push prices to $60, US production would "boom anew", undermining prices again. As prices look likely to stay lower for a lot longer, Opec is in for plenty more acrimonious meetings.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.