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OPEC Could Trigger an Increase in Oil Prices if it Reaches a Consensus in Algiers

By SiliconIndia  |   Friday, 23 September 2016, 00:08 Hrs
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The oil market has been enjoying a warm carpet in the last couple of months in response to the chatter that OPEC member nations want to cut their crude oil production. In the year-to-date period, the global benchmark Brent Crude has gained 30.62% and the West Texas Intermediate (WTI) has gained 24.64%. 

Oil has been trading in a narrow range between $40 and $50 per barrel in the last couple of months. However, experts are speculating that oil could breakout above $50 per barrel if OPEC reaches a consensus to reduce oil prices.

The possibility that oil will break out in the next couple of months is high given the fact that stakeholders are committed to triggering an increase in oil prices. Last month, Russia expressed its support for a production freeze and the Kremlin is billed to meet with OPEC on the sidelines of the International Energy Forum holding in Algeria at the end of this month. This article explores how oil prices could trade in the next couple of months in response to events in the global oil market.

Iran supports the push for stability in oil prices

Iran has been trying hard to recover lost ground in the global crude oil market after UN sanctions had turned the country into a pariah for almost one decade. However, Iran's recent return to the oil markets has worsened the supply glut thereby making it practically impossible for oil prices to rise. Iran was producing oil at a five-year high of 3.6 million barrels per day in August.

Interestingly, Iran returned to the global oil market a point at a time that OPEC is contemplating a production freeze. Hence, Iran hasn’t been fully in support of a production freeze. In the last couple of months, Iran had maintained that it wouldn't agree to reduce or stop its production until its oil production output climbed to 4 million barrels per day. However, Iran seems to have understood that the continued weakness in oil prices won't do anybody much good; hence, the country is open to a production freeze.

Iran President, Hassan Rouhani notedthat "Tehran supports any move for stabilization of the market and improvement of oil prices based on justice, fairness and observation of fair quota for the producing countries."Boris Sneider, a trader with a spread betting positions with an exposure to oil prices on ETX Capital observes that "Iran will be one the biggest beneficiary from stability in the oil market and an increase in oil prices will improve the country's balance of trade".

OPEC won't reach a consensus on oil prices in Algiers

From the aforementioned, it is obvious that stakeholders in the global oil market have expressed their willingness to cut/reduce oil production in a bid to trigger an increase in oil prices. Nonetheless, OPEC secretary-general has hinted that OPEC won't make the decision to cut productionwhen it meets during the International Energy Forum in Algiers later this month.

Mohammad Sanusi Barkindo in an interview with Algerian state news agency noted that the meeting "is an informal meeting, it is not a decision-making meeting". It should be noted that the OPEC secretary-general is a spokesperson of the organization but he doesn’t have any power to make or influence the decisions that the organization makes. Nonetheless, he noted that OPEC would work out ways “to act in one direction: restore market stability.”

However, if OPEC member nations show an inclination towards a supply cut, the organization would call another meeting. Mohammad Sanusi Barkindo also noted that OPEC might call another meeting to discuss to work out the framework for cutting/freezing oil production. In his words, "the informal gathering was proposed as a move to having an extraordinary meeting with the aim of taking decisions to stabilize the market."

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