With the price of oil falling, Tuesday crude oil prices reached their lowest for seven months. Most OPEC members have been trying to cut back on production in order to reduce the level of oversupply of crude, but not all of them.
The issue is that several of the key oil producers have increased their crude output. Unless crude oil output is controlled, OPEC members believe that the price of oil will slide too low to support further investment. The levels of US shale oil output is not helping – but is not solely responsible either.
Benchmark Brent Crude fell to $45.85 a barrel, a drop of $1.06 and its lowest price since mid-November. Just before that low November price was reached, OPEC members had agreed to cut the supply of crude oil by 1.8 million barrels a day. This agreement was to run for six months from – until July 2017. US crude oil futures contract for July dropped to a low of $43.22 – a 98 cent drop, but then climbed up to $43.30.
At a meeting on May 25th, OPEC, along with Russia and others, agreed to continue their production limits until the end of March 2018. However, both the above benchmark prices are over 15% down on their levels at that time. The price of oil is continuing to fall despite the best efforts of OPEC and Russia to support it.
It’s not just the USA that is negating OPEC attempts to support oil prices. Libya and Nigeria are both OPEC members but have been exempt from the agreement on reducing oil production. Oil production in Libya increased by around 6% to 885,000 barrels per day(bpd). Nigeria’s oil exports of Bonny Light Crude are planned to grow from a planned 164,000 bpd in July to 226,000 bpd in August.
Each of these examples of oil overproduction has combined to create an increase in supply. Not only in an oil output increase by OPEC countries, but also by the US. Those OPEC countries not absolved from the agreement are restricting production. Those that were absolved are not This is negating OPEC’s efforts to prevent oil prices dropping to too low a level.
All of this is expected to put further pressure on crude oil prices. US shale oil production will not help. The US has been pumping increasing volumes of oil all year. The number of US oil rigs has increased for a record 22 weeks in a row. This has added to a global glut of oil that has been depressing prices. The $45 per barrel Brent crude price is expected soon.
That said, the US has every right to produce as much oil as it wants. However, with the price of oil falling and crude output increasing, where will it all end? It is likely that when the price of oil reaches a certain level, the US will turn down the taps and play ball with OPEC. But the US will decide what that oil price is.
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