Following its conference on Nov. 30, the Organization of the Petroleum Exporting Countries announced that it was going to extend its oil production quotas through to the end of 2018. Subsequent media reports have indicated that Russia has agreed to continue with its participation in the production quota arrangements. The new agreement has come despite increased political tension between Saudi Arabia and Iran, two key OPEC members.
The price of Brent crude has hovered around $63 per barrel since early November, having climbed steadily from around $45 in late June. The price of North Slope oil tends to track quite close to the Brent price.
OPEC’s current quotas had been scheduled to end in March - the potential subsequent rise in oil supplies could presumably have helped push the oil price into a downward trajectory. According to data from the International Energy Agency, global oil supply and demand were approximately in balance in mid-November, with OPEC countries accounting for around one-third of the supply.
In announcing the outcome of its November conference, OPEC said that global economic growth expectations had increased and that oil demand has been robust, growing to more than 1.5 million barrels per day currently and into next year. This demand figure appears substantially higher than EIA’s reported worldwide demand level for mid-November.
Oil market rebalancing
OPEC also said that rebalancing of the oil market had gathered pace, with the overhang in oil stocks in the countries of the Organization for Economic Cooperation and Development halving since May to some 140 million barrels. The volume of crude oil being held in floating storage has also dropped substantially, OPEC said.
Because, in particular, of uncertainties in future supply levels, but also because of some uncertainty over demand growth, OPEC said that in June it will consider further adjustments to its policy, based on prevailing market conditions and progress in the rebalancing of the oil market.
OPEC’s reference to supply uncertainty presumably refers in particular to U.S. shale oil, a commodity that has become a fulcrum player in the global oil market. With the flexibility to move production up and down relatively easily in response to market signals, shale oil could place boundaries around the range of price movement, pushing up supply levels as the price climbs. On the other hand, buoyant shale oil production also depends on the willingness of investors to put money into shale oil development. At the same time, shale oil development and production have been becoming increasingly efficient, driving down production costs.