Oil prices have had a roller coaster ride since tumbling from over $100 a barrel almost exactly a year ago. Within six months of commencing their downward spiral crude prices were sub $50 in what was one of the quickest and sharpest bear markets seen in recent times. The speed and extent to which oil prices corrected was surprising and reflected a commodity that was clearly very over valued at the time. Production had been ramping up as the US shale revolution was fully underway, but just as barrel after barrel of oil and gas was extracted and being stored in giant tanks across North America, the global economy was wobbling as Asian and emerging economies started to slowdown. The sell off in crude prices was also compounded by the sharp appreciation in the US dollar, which was seeing a huge inflow of capital as investors commenced bracing themselves for the start of the Federal Reserve’s rate tightening cycle. After a brief bounce from the end of January before crude prices took another dive in March amid fears that US storage being at capacity and continued production would lead to another crash in oil, the fears were over played and we are now back around $60 on both Nymex and Brent crude, a recovery of over thirty percent, which many argue marks the return of a bull market.
The test for OPEC at their meeting next week on 5th June is to find the balance between holding onto their market share as the world’s largest oil producing organisation and appeasing its higher cost producing members who are increasingly growing restless from their reluctance to cut back production in order to give oil prices a boost. As oil prices have bounced strongly since the beginning of the year it is unlikely that they will announce a reduction to their daily output target of 30 million barrels a day, a target they have consistently been exceeding even in the face of last year’s crude price crash, proof they are more concerned about market share than market price, in an attempt to keep the US shale threat at bay. If we see no lowering of production oil prices are unlikely to rise much beyond current levels and certainly nowhere near the $100 a barrel OPEC ideally wants to realise, especially at a time when the world’s oil consuming engines of Asia and the US continue to see their economies slowing. As a result, this meeting has the potential to be an own goal for OPEC.