With oil heading for its biggest weekly gain this year and supply disruptions continuing in the Middle East, it has been speculated that OPEC’s output cuts look likely to be extended.
It’s no question that the sector thrives when oil prices are high, so what will a 2% reduction in global production do to oil prices?
OPEC’s deal to cut production of almost 2million barrels per day was agreed late last year, in a bid to counteract the largest oil price fall since the 1985 glut.
It comes as a relief to many; the Energy Information Administration (EIA) reported that crude inventories USOILC=ECI rose 867,000 barrels last week, with prices already beginning to rise.
Amidst previous speculation over OPEC’s position, this increase has propelled their authority back into the market, proving that they still have the ability to influence oil prices. So much influence, in fact, that even countries outside of the OPEC lobby have reduced production. If they continue, are we likely to see prices rise closely to what they were previously?
It’s predicted that prices will reach $60 a barrel this year – realistically, should consumers scramble to buy in bulk as a means of protection against the surge oil prices?
With an increase in demand, this will drive oil prices even higher in full circle. Aside from this, increasing prices will mean more investment and more attraction to the oil and gas sector.
So with supply predicted to tighten even further over the coming weeks, it’s no revelation that OPEC are now weighing in a six-month extension on the deal.
Whilst this suggestion is fully backed by OPEC leaders across the world, there are some reservations. Goldman Sachs believe that an extension is unnecessary given that the market is adjusting and suggest that this extension would backfire, with U.S. shale market bouncing back much stronger in their approach.
But what would be the advantages of an extension on the OPEC deal and an increase in oil prices?
Ultimately, it would be the global economy that would benefit. Higher oil prices will mean that there will be an increase in exploration, production and servicing projects with an increase in budget. With this, not only will equipment and supplies improve, but so will salaries and job prospects.
Following the recent increase, oil producers are likely to be more confident in future prices and therefore profit margins, which will equate to an increase in joint opportunities within the market.
In addition to this, the international rig count has increased by 8 units in the last month alone, now standing at 941. This means that companies are actively seeking to develop more sites, thus demanding urgent requirements for specialists in the market to man them.
With worldwide demand for oil still on the rise, will the renewable revolution change the market dynamics?
While this may be a threat to the market in coming years, as it stands, these emerging technologies remain more expensive than oil and gas.
With the biggest supply change for almost 10 years now looking to be extended, we don’t believe that it’s too soon to say that the sector is slowly recovering. Now might be a good time to get into industry to catch the profits of the upward trend.