OPEC and its allies meet in Vienna this week to discuss production strategies. Oil prices retracted as traders grew concerned that the cartel will fail to extend its 1.8 million barrels per day cut through to the end of 2018.
Brent oil, the international benchmark, fell below $63, while the US benchmark, crude oil, plunged below $58.
Russian producers – trimming the second-largest amount of the cartel – are anxious that extending the cuts will entice a flurry of rival supplies, as oil creeps further above $60 a barrel.
With global stockpiles falling, and prices rebounding, traders are sending a clear message to OPEC that the reduction in supplies is working. Meanwhile, many investors are doubting the ability of the US shale industries’ ability to fill growing demand.
If OPEC continue its strategy soon demand will meet supply, supporting prices at or above $60 per barrel.
Since the cartel first initiated the output cuts last year, Brent oil has risen close to 30%. Now, OPEC just need to hold its nerve and not voluntarily become a victim.
Better-than-anticipated demand has cushioned the recovery of the US shale industry since oil prices reached $60 per barrel. However, a sustained recovery has spooked OPEC and its allies as the crude crash rings loudly in producer’s ears.
Additionally, turmoil in Venezuela poses a risk to OPEC’s plan. Venezuela is on the verge of collapse, with its state-owned oil company, PDVSA, riddled in debt. The economic backdrop has caused production to decline, reaching a three decade low this month. The trend could aid the rebalancing of the oil market.
The battle between market share and higher prices is a fundamental fear in any industry.
Demand outlook for 2018 is one of the largest uncertainties. Increased supply from Brazil, Canada as well as the US could unbalance OPEC’s efforts.
The market has already priced in a nine-month extension of cuts. If the cartel fails to deliver on the deal, the reaction will be very bearish.
OPEC and its allies will reveal its decision on Thursday. Crude oil inventories will be released on Wednesday.