Sliding crude oil prices could be nearing the bottom as major oil-producing countries contemplate an output cap to stabilize the market. The surprise spike of Brent crude to above $50 on Thursday further lifted hopes that an end to low oil prices could be in sight.
Dip in U.S. oil inventory
The climbing of Brent crude to a 6-week high above the psychological barrier of $50 a barrel was linked to a report that showed U.S. oil stockpile decreased last week. The Energy Information Administration reported Wednesday that U.S. crude oil inventory fell by 2.7 million barrels, while gasoline stocks fell by 2.2 million barrels in the same period.
The unexpected steep decline in U.S. oil stockpiles eased investor worries of an oversupply after recent economic data appeared tepid. The U.S. Consumer Price Index measure for July failed to impress, denting expectations of a near-term lending rates increase by the Federal Reserve.
OPEC inspired oil gains
Oil prices have risen almost 15% so far in August, largely fueled by hopes that OPEC members will agree to freeze their output when they meet in Algeria in late September.
Saudi Arabia, the world’s largest producer of oil, has indicated that it is open to a production cut if that will help stabilize prices of the commodity. The country relies heavily on oil money to finance its economy. However, rivalry with Iran has seen the country defeat attempts to control oil production.
At the last OPEC meeting, Saudi Arabia declined to slow down its production unless Iran was also going to do the same. However, Iran said it couldn’t bring itself to cut its production levels to where it was before the pre-international sanctions slap.
A number of those sanctions were dropped early this year, allowing Iran to sell its oil in the international market.
Though Saudi Arabia has shown interest in supporting a production freeze at the informal meeting of OPEC members next month, the country has continued to send mixed signals ahead of the cartel meeting. Saudi Arabia hinted recently that it sees its production in August scaling to new highs.
Despite Saudi Arabia’s appearance of double-standards on the issue of production cap, many OPEC members are badly feeling the heat of the subdued oil prices and are likely to support an output cut to try and lift prices of oil. Russia, another large oil producer but a non-OPEC member, will be part of the producers meeting in Algeria to try and find a solution to the oversupply problem that has destroyed crude prices.
Companies cutting output
It is not just major producer countries contemplating output cap, but oil companies as well have continued to cut back on spending on new oil and gas production. It is estimated that producers in Texas shale and North Sea have already slashed their spending on oil and gas production by close to $1 trillion. The cut in spending on drilling activities is expected to contribute to a drop in oil supply and help lift prices of the commodity.
But there are risks
Though OPEC production cap and cut on drilling activities would provide an environment for crude prices to rebound, risks abound. For instance, there is no guarantee that OPEC members will agree to slow down their production given that some are trying to make up for the weak prices by heightening output to finance their economies.
The other cause for concern is that U.S. shale producers could feel incentivized to return to aggressive production at a slight sign of price recovery.