Oil Dips on Prospect of US-Iran Nuclear Deal Talk
Despite oil group surprise production volume cut, crude oil prices are edging lower amid the weak global economic outlook and the prospects of a nuclear deal between the US and Iran, OANDA analyst Craig Erlam said in a Tuesday note.
Brent crude fell 2% to $93.81 per barrel at last look early Tuesday, after seeing gains following the announcement of the Organization of the Petroleum Exporting Countries and allied producers to reverse the 100,000-barrel-per-day increase in September, Erlam noted.
However, the move is seen as more symbolic than fundamentally significant, as it does not change the market dynamics but could make traders rethink driving prices lower as they have recently, Erlam said.
Despite the optimism surrounding the Iran nuclear deal talks, OPEC+ signalling its willingness to cut output and conduct emergency meetings to address market volatility might quash a drive lower in prices or a change in fundamentals, according to Erlam.
OPEC+ clearly favours a price closer to $100 and it will be interesting to see if the market tries to test the group’s resolve again, Erlam said. MarketForces Africa reported that OPEC+ members surprised the market yesterday by agreeing to cut their output target by 100Mbbls/d for October.
However, given that OPEC+ has been producing well below production targets for some time now, the impact of this cut on actual supply is limited. READ: Oil Gains as Market Expects OPEC+ Output Cuts
What was agreed?
OPEC+ agreed to cut production in October by 100Mbbls/d, which would take production targets back to the same levels as in August. The group highlighted volatility and reduced liquidity in the market as justifications for the move by helping improve stability and ensuring that the market functions in an efficient manner.
Given the volatility in the market coupled with plenty of uncertainty, OPEC+ has not ruled out further action if and when it is needed, ING Economics said in a note on Tuesday.
Is a 100Mbbls/d cut really a 100Mbbls/d cut?
While the headline number is for a 100Mbbls/d cut, in reality, the actual cut will be much smaller. It is important to remember that OPEC+ have failed to hit their production targets all year.
In July, OPEC+ output was actually more than 2.7MMbbls/d below the target production. Most producers have not been able to hit their targets and are producing quite some distance below where they should be.
It is only Saudi Arabia, the UAE and Kuwait that have been producing at or near their agreed output levels. Therefore, it will likely be only these producers that will need to reduce output by their share of the 100Mbbls/d.
Combined, these three producers would need to reduce output by around 40Mbbls/d from September levels, ING Economics said. # Oil Dips on Prospect of US-Iran Nuclear Deal Talk