By Haniyeh Sadat Jafariyeh

Oil market: From high hopes to high prices

October 19, 2016

Although reaching a consensus among members of Organization of the Petroleum Exporting Countries used to seem surprising majorly due to the row between Iran and Saudi Arabia over output freeze, for the first time in eight years members of the organization agreed in the Algiers meeting on September 28 to cut output to 32.5-33 million barrels per day (bpd) from the current level of around 33.24 million bpd.

Although reaching a consensus among members of Organization of the Petroleum Exporting Countries used to seem surprising majorly due to the row between Iran and Saudi Arabia over output freeze, for the first time in eight years members of the organization agreed in the Algiers meeting on September 28 to cut output to 32.5-33 million barrels per day (bpd) from the current level of around 33.24 million bpd.

International oil prices witnessed an increase following the decision. In the week ending to September 30, the price of OPEC basket of fourteen crudes stood at $43.13 per barrel, registering a 66-cent rise compared to its preceding week. Iran’s light crude, as well, rose 33 cents and reached $42.61 in the time, while price for the country’s heavy crude increased 25 cents and hit $40.76 per barrel.

While some regarded the increase in prices as the market’s psychological reaction to the Algiers agreement, Iran’s oil prices have since experienced an unprecedented trend of rising. 

The price of Iran’s light oil in the week ending October 7 witnessed a $5.24 rise per barrel to reach $47.85 and its heavy oil price experienced a $5.79 growth per barrel to stand at $46.55. The average price of Iran’s crude oil as of January 2016 stands at $36.90 per barrel. During the same week, Brent crude oil prices increased $2.85 per barrel and reached $49.53. The price of OPEC's basket of fourteen crudes stood at $48.58 a barrel. 

Thus, oil prices have trended higher since September 28. For the time being, many think that prices could continue rising in the short term on expectations related to output cuts proposed by OPEC. But would oil prices remain range-bound within the next year? And to what extent the prices may go up?

As a matter of fact, there is no definite answer to the questions but hopes are high that prices will be stabilized above $50 per barrel in the short term before edging higher next year.

Edward Morse, the global head of commodities research at Citigroup, told ABC news on October 15 that with Persian Gulf producers curtailing output by 600,000 bpd and the Russians chipping in between 100,000 to 200,000 bpd, "If credible - and Citi believes it would be - that should be enough to stabilize prices well above $50, reaching the mid $60's by end 2017.”

According to the ex-head of Iran’s Oil Ministry market analysis department, Mohammad-Sadeq Me’marian, “the optimum range of crude oil prices would be $50- $60,” IRNA reported on October 14. “Crude oil prices highly rely on the global economy and market demand,” he said, “and since the international oil market is in recession, the equilibrium point for oil prices is lower than before; therefore, prices will not surpass $80 or $90.”

As Mohammad-Ali Sadeqi, an Iranian energy expert, told the Tehran Times, “Considering the preliminary agreement achieved in Algiers, the international oil market will experience a positive trend in 2017, with prices incrementally ascending to $60 or $70”.

All and all, while OPEC plans to set concrete levels of production by each country at its next formal meeting in November, $60 per barrel would be the most probable price for oil by the end of 2017. But what if OPEC cannot finalize the expected deal?

As some assume, despite lower output by top exporter Saudi Arabia, other oil producers seem to row against the tide which made supply from OPEC rising to 33.6 million bpd in September from a revised 33.53 million bpd in August. In late September, Iraq boosted northern exports and Libya reopened some of its main oil terminals; moreover, as Iranian senior officials have repeatedly expressed, the Islamic Republic, OPEC’s third-biggest producer, plans to boost its oil output to 4 million bpd this year. The country pumped 3.63 million bpd of oil in September, Bloomberg reported.

Therefore, OPEC’s plan to cut supply in an effort to prop up prices and its ability to maintain its new production target of between 32.5 million and 33 million bpd would potentially come under question.


However, some optimistically await OPEC to cut production level. They believe that reaching a deal can be beneficial to all members.

HJ/MG

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