Oil rallies on talk of extending OPEC supply-cut

Oil prices rebounded on Thursday as OPEC leader Saudi Arabia and ally Russia, meet to discuss a possible extension of production cuts.

After trading below the $50 mark overnight, crude oil managed to gain 0.5% amid rising exports from the US. Meanwhile, Brent oil gathered up 0.9%, after the roughest few days since early July.

Russian president Vladimir Putin noted that OPEC and allies could extend the cuts until the end of 2018. The original deal started in January, in an effort to tackle the supply glut which has plagued the industry. By agreeing to cut 1.8 million barrels a day, the cartel have made strides in the price war, solidifying gains, particularly seen in the last three months, as investors see the dent in supply.

Thanks to the reduction in output and better-than-expected demand in Asia and, more surprisingly, in industrialised nations, prices have creeped up.

The robust US shale industry has continued to cap gains. Higher prices mean US producers have higher margins, allowing ample room to leave the taps on oil rigs flowing.

How did the price war begin?

Back in November 2014, OPEC ministers huddled in Vienna to discuss the dramatic fall in oil prices. Oil prices had plunged to their lowest point in four years. For decades, the cartel would suppress production sending oil prices higher, this time, however, was different. OPEC’s usual price manipulation schemes were not enough to shift oil prices.

Fracking was the game changer that revived the shale industry and helped to solidify American’s dream of independent of foreign oil.

Once again Research and Development proves to be one of the most important facets of a business.

While OPEC members were distracted by under-cutting its competitors and curtailing oil production, the US were busy devising ways to extract oil and gas more efficiently. By employing unconventional means of extraction and investing more in technology, the techniques of US companies became more and more cost effective which brought down the breakeven point from about $60 to about $40 per barrel.

In 2011, former President Barak Obama devised a plan to decrease America’s dependence on foreign oil. Obama established a plan to reduce oil imports by one third by 2020. The strategy was composed in an effort to stimulate economic growth, create jobs and bring down the trade deficit.

  • What were the basic components of the plan?
  • Firstly, to Invest in research and development
  • Secondly, Substitutes for oil
  • And finally, to Support stronger fuel efficiency

So, what’s the oil market like under the Trump administration?

Donald Trump promises to go not one, but five steps further than Obama’s era.

A self-professed lover of fracking, Donald Trump intends to revise the Obama administrations rule which required companies to disclose chemicals used on federal land when fracking for oil and gas.

However, Trump may not necessarily be bullish for oil. The president plans to sell-off half the US reserve stockpile to help balance the budget. Although the proposal has faced pushback from Congress, the plan could undermine the US shale industry by flooding the market with supplies.

The oil market is particularly sensitive to bearish news right now however less sensitive to bullish readings.

However, defiant and exempt OPEC members as well as the robust US oil industry have presented an insurmountable barrier for oil. Only a relentless fall in total US storages will hurl oil from this bearish market, but so far, all we’ve seen are swelling stockpiles.

Saudi Arabia’s efforts to re-balance the rise in Libyan and Nigerian supplies by reducing output by 1m barrel a day is an admirable approach. The cartel would ensure investors that they will do “whatever it takes” to revitalise the market. If Saudi Arabia make the cuts we should see oil tip above $50 again.