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Oil Futures Bullish On Continued Production Cuts

By Dr. Mike Campbell
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.

The main reason why oil prices remain low is that supply outstrips demand. This is partially because new production has come on line and partially due to subdued demand as the world continues to recover from the economic pneumonia of the Global Financial Crisis which has left the global economic recovery in a relatively feeble state. If you are an oil producer, you can't drive up demand, but you can throttle back on output in the hope of pushing up the price of your commodity. However, for this strategy to have any significant effect, all of the major players need to be following the same policy. 

It seems likely that the current deal amongst Opec nations and some other key oil producing nations will be extended. A meeting between Russian and Saudi Arabia was held in China and putative agreement reached to maintain production restrictions until next March agreed. The upshot was that crude prices gained 3% with a barrel of Brent crude rising to $52.52. Between them, Russia and Saudi Arabia produce approximately 20% of the oil consumed by the world every day – about 20 million barrels.

A joint statement after the meeting Alexander Novak and Khalid al-Falih, the Russian and Suadi energy ministers said: "The two ministers agreed to do whatever it takes to achieve the desired goal of stabilising the market and reducing commercial oil inventories to their five-year average level."

It has been suggested that US output, which is not included in the deal, might scupper the agreement, however, the current weak oil price makes exploitation of US shale oil deposits marginal, so the US also has a vested interest in seeing the oil price rise from a producer’s perspective, but this is tempered as the US is the largest market for oil. US oil production has risen by 10% over the last year.

Dr. Mike Campbell
About Dr. Mike Campbell
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.
 

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