Oil prices could jump $10 a barrel if OPEC extends output cap deal, analyst says


Bad communication between OPEC members: Analyst

It has been a troubled week for oil prices, which dropped to below the $50 a barrel threshold for the first time this year.

But the cost of a barrel of oil could jump to $60 by the end of this year if OPEC countries decide to extend their output cut agreement, an analyst told CNBC.

“We could see WTI go down into the mid-40s but we do still see that rebalancing story intact. Fundamentals haven’t changed dramatically this week,” Richard Mallinson, geopolitical analyst at Energy Aspects, told CNBC on Friday.

“If OPEC extends the deal, we see prices above 60 before the end of the year,” he added.

Oil prices dropped significantly on Wednesday and Thursday after the Energy Information Administration said that U.S. inventories rose by 8.2 million barrels last week. But the main driver for the fall was comments by the Saudi Energy Minister Khalid al-Falih.

“I think the immediate trigger was comments by the Saudi Arabia minister this week. He said that it wasn’t guaranteed that OPEC would rollover its production cuts deal to the second half of the year and the market had taken that for granted,” Mallinson said.

Inevitable return of US shale growth is a key risk to recovery: Jefferies

Last year, OPEC members agreed to cut output by 1.2 million barrels a day starting in January to revamp oil prices. Other oil-producing nations joined a few weeks later, agreeing to remove 558,000 barrels a day of crude oil from the market. The agreement is in place for the first half of 2017.

Marc Kofler, the research analyst at Jefferies, told CNBC that we’ve seen “a reality check over the last few days.”

Oil prices recovered on Friday with Brent crude above $52 and WTI trading at $49.50. 

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I am not sure that I agree with the view that crude oil price could just to $60 per barrel if  OPEC would extend the production cut agreement.There are a few main reasons why it is doubtful.

  1. The U.S. shale producers will not let it happen. As soon as oil prices rise, the output from the U.S. will increase accordingly. The huge number of DUC would allow oil companies to boost production quickly. It is unreasonable to assume that it will not happen because for U.S. producers it is vital to generate as much cash as possible to ensure that they can repay ballooning debt. The debt issue becomes critical as Federal Reserve about to hike the rates.
  2. Trump’s policy of deregulation of the petroleum industry and tax cuts in combination with constantly improving technology will reduce the costs allowing oil companies to increase the output. 
  3. Trump’s unpredictability and negative views on globalisation represent the grounds to believe that the growth potential for various industries will be limited. The fundamental requirement for businesses to grow constantly will eventually collide with the isolation policy.
  4. Shrinking markets as a result of protectionism coupled with rising volatility worldwide would affect companies and either stagnate economic growth or cause the worldwide recession. Needless to say that demand will decline accordingly.