Home > market > mark-to-market > Opec-allies’ output cut may not amount to big shift in oil prices

Global oil markets can have a small celebration. The Organization of the Petroleum Exporting Countries (Opec) has agreed to cut oil output by 800,000 barrels per day (bpd) starting January. Simultaneously, non-Opec friends will cut production by 400,000 bpd. Together, the output cut amounts to 1.2 million bpd and is broadly on expected lines.

On Friday, Brent crude prices increased by 2.7% to $61.67 a barrel. According to an analyst who did not want to be named, the current deal would support Brent crude prices in the range of $60-65 a barrel from a near-term perspective. “It is possible Brent may inch towards $70 a barrel provided demand is consistent and these countries are compliant with the cuts," he added.

However, the good news for a major importing country like India is that oil prices are unlikely to touch October highs of around $85 a barrel anytime soon. That’s because oil markets are well supplied at the moment.

The US turned into a net oil exporter last week, breaking 75 years of continued dependence on foreign oil, said a Bloomberg report last week. This was helped by record production in the country. Watered-down American sanctions on Iran, as waivers were granted to eight countries for a few months, meant more-than-initially-anticipated Iranian oil supply in the market. Additionally, Opec and non-Opec friends were producing more in recent months in anticipation of lower Iranian oil exports post- US sanctions.

Another reason which will limit a meaningful spike in oil prices is that there are concerns on the demand front. There are slowdown concerns in the US and China, two large oil consumers, and that can weigh on prices. In its oil market report in October, the International Energy Agency had reduced its demand growth forecast for this year and the next.

Further, an escalation in the US-China trade war post the 90-day truce is something investors will have to watch for.

Meanwhile, Opec and non-Opec members will meet in April to review market conditions. Until then, news flow on global macroeconomic growth and US production could offer meaningful clues on oil prices.

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