The rig count as reported by the Baker and Hughes for the last week increased by 21 making the total 652 the highest since September, 2011. As I have mentioned in another article these ballooning inventories are going to thwart future efforts for stabilizing oil prices. Why? Because, the level of inventories is perilously high. Secondly, the US production is rising (from 8mbpd to more than 9mbpd) and it will continue to do so. The extension of Vienna accord corroborates the above argument. However, KSA has a catch-22 situation here. The first scenario where we can see the deal getting repeal will translate into, once again, each member drilling oil as per its own will. The outcome will be the prices will fall as a result of rising supply. The second scenario, where the cuts are extended, the prices will increase, which will result in more drilling activity by the Shale producers, subsequently, rising supply and the prices once again, falling/stalled. What the oil market need is stability. Also, demand.
So the questions: To extend or not to extend is not the main issue. This will only provide a ephemeral cushion for the oil prices for the short term. Mr. Fereydoun Barkeshli, Advisor to the International Institute of Energy Studies and Chairman of Vienna Energy Research Centre, shared his thoughts with me as “2017 may not prove an exceptional year for the international oil market. OPEC-NOPEC has already done a good job in curtailing price deterioration. However, stocks are still high and rising. United States has so far been the winner and has kept raising its shale output. For those OPEC watchers, the organization is traditionally not in the business of drastic or radical decisions. Market has to grasp the realities and OPEC determination to hold its decisions”.
The production cuts seem not to be working, they (oil producers) have to pull something else to stabilize the markets.