OPEC's Big Decision

At the time of this writing, US Crude Oil Futures were trading at $45.53. Not the most attractive figure, but we have sure come a long way from the $18.84 average for April of 2020. Those of you who subscribe to our ITR Trends Report™ may have noticed that we expect the Prices three-month moving average to generally rise throughout the next four quarters. This is, of course, good news for oil producers as well as those who sell equipment or services in this space.

There are several factors that contribute to our expectation for higher Prices in 2021:

• US Crude Oil Inventories are declining. High inventory levels, which lead to excess supply and thus a lower price, were especially an issue during 2Q20.
• The Gasoline Consumption average is up to over 8 million barrels per day. (April was the low mark for 2020, coming in below 6 million barrels per day.)
• The US Industrial Production 3/12 rate-of-change has risen during the past four months, indicating that the broader economic recovery is here.

Therefore, based on supply and demand fundamentals, it seems clear that the market is headed for higher Prices, right? Unfortunately, we know it’s not that simple.

The Organization of the Petroleum Exporting Countries, known as OPEC, concluded a very important meeting last week. Back in April, OPEC members made the decision to cut production levels to buoy prices and protect the industry from a decline that would have likely been more severe had they taken no action. Most recently, OPEC was discussing whether to extend those production cuts or change course and increase production.

It was a tricky situation for OPEC. Let’s lay out the two scenarios they were considering:

• A decision to extend cuts would have theoretically contributed to further rise in Oil Prices. Meanwhile, the US and other global non-OPEC producers were likely try to gain back some of their lost revenue by selling more.
• A decision to increase production was likely to put downside pressure on Oil Prices, at least in the near-term. This in turn would hurt OPEC producers, the US, and non-OPEC producers. However, OPEC was likely to maintain its market share with this move.

The Result:

Meetings were ultimately put on hold Dec. 1 after debates stalled and little progress was made. However, by Dec. 3, the decision was clear. OPEC and its allies agreed to increase production by 500,000 barrels per day. As of this writing, Prices were still holding around the $45-per-barrel mark, with global demand continuing to outpace supply. Will that dynamic persist in the wake of a worldwide uptick in COVID-19 cases and deaths? The price of oil depends on it.

To know more, follow our Oil Prices forecast in the ITR Trends Report™.

Taylor St. Germain

Analyst and Speaker