Oil Continues to Fall as OPEC Optimism Wanes

Higher oil prices drive the Saudi and Russian economies. With falling prices, both the economies have had to face setbacks. Now, Russia has agreed to join in OPEC’s decision to continue reducing oil output beyond 2017. However, a few experts claim that Russia might not be the best ally for Saudi’s oil price hike drive. Their alliances have been notoriously dubious in the past as well. Additionally, OPEC nations do not enjoy a reputation of mutual co-operation. Owing to these factors, prices continue to be pulled down despite positive efforts from the oil cartel.

Oil price rise graph illustration Oil pump icons green

Russia and OPEC- Partners or Not?

 

When an agreement to reduce oil prices was reached in Vienna in 2016, Russia had agreed to reduce output. The agreement witnessed a surprising compliance of over 90 percent. OPEC countries and Russia are not well known to comply but desperate times have called for desperate measures. Russia had angered OPEC back in 2001 when it did not comply to restrictions. In fact, Russians pulled off a massive PR exercise while they increased oil production instead of reducing it.

This time too, the Russians could be doing the same. Though they have reassured that they will be continuing with production cuts, OPEC itself has lost a battle in oil supremacy. OPEC does not have an option but to work with an unreliable Russia to reduce the impact of US shale oil. Note that despite their mutual interest in raising oil price, Russia and Saudi have contrasting ideas on the Middle East situation, especially the Syrian war. The two will have to keep political influences at bay while making their economies work.

US Explores More Oil

 

It is to be noted that OPEC does not command the oil industry anymore. The rise of US shale oil has promptly snatched the title of ‘oil influencer’ from the cartel. Despite their greatest efforts to reduce production and hike prices, US continue to produce more shale oil. In fact, the restrictions by OPEC could bring oil to the $50 mark. However, this encouraged more shale producers to flush the markets with their oil.

Now that US is following its shale oil dream, a restriction in production will not be enough for OPEC to sell its oil at a high price. In fact, OPEC has landed in a vicious cycle of production cuts, oil price hikes, more shale oil and lesser dominance in the oil world. The impact of continuing cuts till first quarter of 2018 could be weaker than OPEC expects.