The price per barrel after the cut announcement has stabilised at around $48 for WTI Crude and $49 for Brent Crude, which is not alarming by any means. The concern is not necessarily over this particular cut though, but what it could signal for OPEC policy going forward.
If this latest reining in of crude output by 700,000 barrels a day is a one-off then the investment implications are very limited but if it heralds a real change in stance which will result in further cuts and a significant oil price rise, the impact could be significant.
The cheap petrol of recent time has been a real boost for the oil importing economies like the UK and US and most of Europe. A much-needed boost against the background of a slowing China, Brexit, central banks running out of options and various geopolitical troubles. Taking this away in fairly sudden fashion has the potential to pull the rug from under consumer spending and economic growth.
Solomon Nevins, an investment manager at Architas, noted that it is possible US shale producers could fill some of the supply gap created by OPEC’s decision, so the price effects may be short-lived.
“The fact that OPEC is willing to cut supply is more significant than the actual cut itself – 750,000 barrels less per day is below a 2% cut and is not enough in itself to adjust the supply and demand of the oil market,” he said. “To put it in context, Russia grew their oil supply by 400,000 barrels in August compared to the previous month. I wouldn’t expect a strong run in oil unless there is a much larger cut.
“More importantly, after two years of high supply and low prices, it appears that OPEC has thrown in the towel and doesn’t want to fight with US shale suppliers anymore,” Nevins added. This signal, and the higher price environment, will serve as a green light for US supply expansion and the opportunity to fill the gap left by OPEC. Any bounce in the oil price is only likely to persist for a short period until non-OPEC suppliers respond with increased production.”
According to Bank of America Merrill Lynch however, there is a significant price climb to come in the near future. The bank is now forecasting an average price next year of $61 per barrel.
