Crude oil prices drop days after OPEC output cut

• EIA declares uncertainty over impact on market
Brent crude oil price dropped by 1.87 per cent to $53.93 a barrel after hitting $54.19 a barrel following the decision by the Organisation of the Petroleum Exporting Countries (OPEC) to cut production output a week ago.

The price of Brent crude had risen by 4.5 per cent to $54.19 a barrel, its highest level this year.

The deal, OPEC’s first output cut for eight years, was designed to reverse a slump in global oil prices and was expected to see the group reduce production by 1.2 million barrels a day from January 2017.

But a few days after the output cut, crude oil prices crashed with West Texas Intermediate declining by 1.69 per cent to $50.93.

Meanwhile, the United States Energy Information Administration (EIA), is uncertain about the extent the cut in production output would affect crude oil prices.

Lamenting the decline in crude oil prices on Wednesday, at a Petrotech 2016 Panel: OPEC Secretary General, Muhammed Barkindo, said that the downward spiral has given oil prices increased visibility in recent years in major economic centres and in various industry fora.

Barkindo, who spoke on: Uncertain Oil Prices in India, said: “During both cycles, low prices achieved only one thing: they dramatically choked off investments. Research and development spending was reduced. And drastic cost-cutting strategies were put into place across the board. Young people also lost any interest they might have had in making a career in the oil sector. And, in the long term, global supplies were put at risk.

“This, of course, sounds strikingly similar to the conditions we have been seeing lately – with global investments falling, oil revenue decreasing and impacts on the global economy, including declining trade. In fact, global exploration and production spending fell by around 26 per cent in 2015, and a further 22 per cent drop is anticipated in 2016. Combined, this amounts to more than $300 billion, and this trend is expected to extend into its third year, which is unprecedented in the history of oil industry.

“This is a stark contrast and challenge when we all know that, apart from the development aspirations and healthy economic growth of many producing countries, our capital intensive industry always requires huge investments for the production of new barrels, not only to meet growing demand but also to accommodate for decline rates from existing fields. With the current state of the oil market, the industry will simply not be able to comply with the massive oil-related investment requirements that are estimated to be around $10 trillion in the period to 2040.”

As in the previous downward cycles of the 1980s and 1990s, Barkindo said that it has been necessary to find a way to expedite the long-delayed rebalancing of the market in order to restore stability.

This current cycle’s recovery process, according to him, has taken far too long, and the risk of delaying the adjustment any longer would be costlier and more complicated with a host of negative implications in the coming years.

The IEA said in its December oil report that the extent to which the announced plans will be carried out and actually reduce supply below levels that would have occurred in their absence remains uncertain.