Production Cuts and Market Gluts

Despite weekly inventory stats showing a draw this week, the market continues to head downwards. Crude just broke through $47 this morning. Statistics may have shown a draw on crude, but there is still the overlying concern that the supply glut has not yet been defeated. It’s obvious that there is still a lot of work left to go, in regards to balancing supply in the market, hence the reason OPEC is meeting again this month. OPEC will be voting on whether production cuts will be extended and/or increased to help raise the price floor. Recent comments out of OPEC seem to indicate an extension is likely, but increased cuts are less likely.

Analysts such as Eugen Weinberg (Commerzbank) caution that prices are likely to rebound in anticipation of the upcoming OPEC meeting . However, he makes the point that he would not be surprised if the market will come right back to where we are now after the meeting is over.

In my mind, what Weinberg is saying is this: He expects that the market will have already “priced-in” the expectation for OPEC to extend production cuts past June. With that being said, if OPEC does not come to a decision this month, then there could be a good chance that the bears will rule the oil kingdom once again.

Even if OPEC does not extend production cuts, some wonder how much of an influence this will have on prices. According to Reuters, the market will start to recognize that OPEC is no longer as influential as it once was. Years ago when OPEC made an announcement, the market would react strongly. However, in today’s world some are starting to notice that other factors play a bigger role, such as U.S. shale production levels, resulting in less volatility around OPEC news.  

 As of 11:15 a.m. ET, the market is down strong around 4 cents on both heating oil and RBOB, while WTI crude is currently sitting around $46.50.

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