Oil goes off the boil

Oil began the first week of 2017 “with a bang but ended it with a whimper”, says David Sheppard in the Financial Times. After reaching an 18-month high of around $58 a barrel on Tuesday 3 January, oil fell back as traders began to wonder whether the 30% jump in prices in December was really justified. Oil-exporting cartel Opec has agreed to rein in production to help mop up a glut and bolster prices.

Top producer Saudi Arabia has hinted at going even further than it signalled at the end of last year. Non-Opec producers such as Russia have also agreed to cutbacks. But having got so excited about the prospect of the deal, the market “is now looking for evidence of compliance”.   

Good luck with that, says Irwin Stelzer in The Sunday Times. Opec “has never been good at preventing its members from cheating by over-producing their quotas”. The cartel will probably manage about two-thirds of the targeted cuts, which implies they will take 1.2 million barrels per day off the market. However, Opec members Libya and Nigeria, who have been exempted from cuts, may be tempted to boost output to bring in more money. In Libya, for instance, production is running at around 50% of its potential level. There is also a chance that Russia will co-operate “only until Vladimir Putin’s need for cash to finance his military adventures overwhelms his desire to honour his commitment” to Opec.

Note too that US fracking has become so efficient and cost-effective, continues Stelzer, that some can operate profitably with oil at $40. JP Morgan Chase’s Scott Darling reckons that $60 oil would prompt US frackers to boost output by 600,000 barrels. Throw in a big overhang of unsold inventories and the promised Opec output cuts could be largely offset, especially if demand growth falls short of expectations. Not for the first time, the oil market may have jumped the gun.