Oil prices collapse as OPEC sees production outpacing demand

Roman Schwartz
November 14, 2018

Extraction from American shale fields has propelled US oil production to record highs this year with crude output now at 11.6 million bpd, helping make the United States self-sufficient in energy.

During its last meeting, the Organisation of Petroleum Exporting Countries (OPEC) and its allies led by Russian Federation acknowledged that an oversupply of oil in the market is imminent in 2019.

Brent dropped US$1.97 a barrel, or 2.8 per cent, to a low of US$68.15 and was trading at around US$68.40 by 1045 GMT.

WTI (oil futures on NYMEX) caught a fresh bid-wave and broke the downside consolidation phase, bouncing almost $ 1 on the latest reports that the OPEC and its allies are reportedly discussing oil supply cut of 1.4 million barrel per day (bpd).

Saudi Energy Minister Khalid al-Falih said on Monday that Opec agreed there was a need to cut oil supply next year by around one million barrels per day from October levels to prevent oversupply.

OPEC and allied oil-producing countries will likely need to cut crude supplies, perhaps by as much as 1 million barrels of oil a day, to rebalance the market after USA sanctions on Iran failed to cut Tehran's output, Saudi Arabia's energy minister said Monday. He said there was now an oversupply of oil, leading to plummeting prices, and that the kingdom would curb its output to stabilize the market.

Given that, I would still expect oil to weaken ahead of the December OPEC+ meeting in Vienna until rumours of real production cut values are being reported in the media. As of last week, hedge funds and other money managers had reduced their long position in oil contracts to their lowest since August 2017.

Brent oil prices have plunged 25 per cent since reaching a four-year high of more than $86 per barrel in early October.

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Oil markets remained on a weak footing on Wednesday after a 7 percent slump the previous session, with surging supply and expectations of faltering demand pressuring crude prices.

Speculators have pulled back on heavy bets on an oil rally, a process that continued on Tuesday, traders said.

Trump appeared to criticize the announcement in a Monday tweet: "Hopefully, Saudi Arabia and OPEC [Organization of the Petroleum Exporting Countries] will not be cutting oil production".

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In addition to Trump's tweet, the price of oil has come under pressure because of fears that weakening economies outside of the US could diminish demand.

On Monday, the rupee settled at 72.89 per dollar, showing a loss of 39 paise or 0.54 per cent over the last close due to a rise in oil prices after Saudi Arabia announced plans to cut production and the dollar strengthened in global markets.

Most analysts expect U.S. output to climb above 12 million bpd within the first half of 2019.

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