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Oil hits fresh 3-month low following OPEC meeting

The oil price was under intense pressure during Monday’s trading, as the market digested OPEC’s decision to more or less keep pumping at will.  The oil price was trading well below the $40 level, which it also violated the previous week (this refers to the US WTI benchmark).  The fact that there was no OPEC ceiling to adhere to drove prices even lower than the news that the ‘old’ 30 million barrels a day ceiling had been raised to 31.5 million.

An acute problem that OPEC is faced with is the rivalry between key oil producers Saudi Arabia and Iran.  As the two Middle Eastern powers are fighting proxy wars in different countries such as Syria and Yemen, it is difficult for them to reach a compromise on such an issue.  Iran on the one hand is adamant that it will increase its production by 1 million barrels a day once the sanctions are lifted as of next year.  This is a decision on which the Iranians appear very inflexible.

On the other hand, it appears that Saudi Arabia is refusing to reduce its oil production unless other key countries such as Iraq, Iran and Russia also cut their production.  None of these three countries, which face more intense economic challenges compared to Saudi Arabia, are willing to take such a decision.  Russia for example has also been producing at a record pace as it is trying to maximize its revenue by selling more barrels.

The end result is a falling oil price which could eventually force the higher-cost producers out of the market.  For example a significant portion of the shale oil output of the United States has been cut (around 1 million barrels per day) and other non-OPEC high-cost production is expected to drop.

In the meantime, as oil surpluses keep climbing, oil production could strangely enough hit limits such as the inability to store additional oil as well as some producers being unable to cover their cash costs.  Of course no one knows for certain where that bottom will ultimately be reached and it probably lies between $20-$40.

The drop in the price of oil is also affecting currencies such as the Canadian dollar and those of other producers.  The US dollar made a fresh 11-year high at 1.3492 against the loonie in late European session.


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