Oil price increases have taken place due to an improving US job market and assurances by Saudi Arabia. These have been influential in halting the oil price slump and reversing the trend. Oil prices were up 1.5% on Friday after 5-month lows. The assurances were related to Saudi Arabia assuring Russian participation in the reduction of crude output. Russia will join OPEC in trying to reduce the oil glut that has been plaguing the industry.
Oil has been oversold for too long; fundamentally, there has been too much of it available. A reduction in oil production is long overdue. Crude stocks and the glut must be reduced if there is to be any stability in oil prices. OPEC must either abandon the existing agreement or increase restrictions on crude production.
Regarding the increases, Brent Futures rose by 1.5% (72 cents) to $49.10 a barrel. U.S. West Texas Intermediate crude also rose 1.5%. This time to $46.22 a barrel, 70 cents up. Both had dropped by 5% Thursday and continued to drop overnight. WTI stood at $43.76 and Brent crude at $46.64, its lowest price since 30 Nov. That was the date OPEC agreed to reduce crude production until mid-2017.
Many now believe that the cut-back agreement may need to be extended for a further 6 months. The exact length of any extension would need to be discussed. However, the oil market has to be rebalanced and that seems the best way meantime to achieve that. Sources have inferred that the May 25 meeting is when OPEC will agree to extend production cutback. However, it is unlikely that the cut will be any deeper than it is at the moment.
To complicate matters, the U.S. jobs market is growing and a drop in the unemployment rate is generally associated with an increase in oil demand. The unemployment rate dropped to an almost 10 year low of 4.4% in April and it is important that crude production is not increased when demand increases. Existing stocks must be used to meet any demand increase.
Irrespective of the oil price increases Thursday, Brent and WTI crude dropped for what is now three weeks in a row. Brent dropped by 5% and WTI by 6%. This is the longest losing streak for either crude benchmark since November. Nevertheless, it is evident to most that the OPEC cuts this year have not been as effective as hoped. The oil market remains oversold and the OPEC cartel and other crude producers have work to do.
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