OPEC could accidentally sink oil prices

Saudi Arabia's Oil Minister al-Fa lih addresses a news conference after an OPEC meeting in Vienna

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Saudi Arabia’s Oil Minister al-Fa lih addresses a news conference after an OPEC meeting in Vienna
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Thomson Reuters

  • OPEC members have lifted oil prices by cutting production since January 2017.
  • Production cuts are widely expected to extend beyond 2018, when the current deal expires.
  • But if OPEC members end up throwing out the deal without warning, it could send prices spiraling downward.

The global cartel that’s aimed at propping up oil prices could accidentally send them plummeting next year.

If OPEC lifts its production caps at the end of the year, it’s likely that oil prices will gradually fall in 2019 – Thomas Pughs, an economist at Capital Economics, predicts Brent crude oil will drop to $55 a barrel from $75.

But if they don’t ease the oil market into any decision to cut production, it could be painful.

“There is a significant risk that OPEC does not give any clear indications of its intentions for output next year prior to its meetings, which could result in a much quicker and sharper fall in prices than we are anticipating,” Pughs wrote Wednesday in a note to clients.

The cartel, along with non-OPEC members led by Russia, struck a deal in November 2016 to cut oil production by nearly 2 million barrels per day, in efforts to tackle a global oil glut that had been plaguing prices since 2014.

The future of those oil caps, which expire in 2018, is anything but certain. Saudi Arabia, who is widely seen as the unofficial leader of OPEC, has said it’s necessary to continue limiting oil production.

At the same time, lifting oil caps is an attractive move for OPEC. Oil prices have risen more than expected this year – Brent crude, the international benchmark, topped $71 a barrel in January. Higher prices encourage output by non-OPEC members, like US shale producers, so keeping oil cuts would mean losing more market share.

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Thomson Reuters

“This has created uncertainty in the market which could lead to sharp price movements around OPEC’s next meeting,” Pughs wrote.

Additionally, member countries – Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia and the United Arab Emirates – only meet twice a year, and their decisions are often last-minute. This leaves limited opportunities for the group to officially update policies.

In the meantime, investors are left to speculate from statements by individual members – which can be contradictory and even misleading, according to Pughs.

“Members will typically hint at additional output cuts or make positive statements if prices have fallen rapidly, in an effort to boost investor sentiment,” Pughs wrote.