OPEC and Russia led cuts deal that has sent the prices to reach new highs may be in a danger. The deal during the year 2017 has been managed relatively better compared to the previous ones but the cartel and the other participants face many challenges in the year 2018.
The deal was extended during the last meet at the last OPEC meeting in Vienna, to stretch the deal till the end of year 2018.
The rising oil prices coupled with the increasing US production has had some participants eyeing to withdraw from the cuts deal and to take benefit. U.S. West Texas Intermediate (WTI) crude futures were at $62.13 a barrel at 0123 GMT – 40 cents, or 0.65 percent, above their last settlement.
Brent crude futures were at $68.12 a barrel, 34 cents, or 0.5 percent, above their last close. Brent touched $68.27 last week, it’s strongest since May, 2015.
The investors worry about the continuation of OPEC deal for four fronts: 1) Oil Production halting in Venezuela/Iran 2) OPEC Member Cheating 3) Deal serves the purpose and lastly 4) Rise in US Shale Production.
The Venezuelan Government has recently defaulted on its debt payments as the economy was based entirely upon the Oil Production Revenues, after the prices fell during the 2010 – 2014, the South American nation was brought down on its knees. Coupled with that, the Iranian situation which may yet hold the potential to trigger a complete halt in production would shift the dynamics altogether. As other members would eye to fill up the resulting gap from production shutdown in any of the two problem ridden countries.
It then comes down to the compliance from the OPEC nations, the OPEC Deal currently in progress has been a success because of its customization. The deals differ for each country based on her reserves and economic conditions. However, with the rising prices and US Production, these countries may falter and take advantage.
United States is soon to become only of the leading oil producers in the world third only to Russia and Saudi Arabia. The output is expected to cross 10 million bpd, matched only by Russia and Saudi Arabia. Investors are worried that the US production is rising too much and too fast, sparking fears that the US Production will grow. But if it grows too much, the Russia and other OPEC members will ditch the pact and start defending their market share.
Lastly, no one knows what prices OPEC finds suitable for it continue the cuts. And what would happen if prices do reach a given level and OPEC and other abandon the deal? The analysts have been worried that the cuts unless lifted by demand will have no long term impact on prices of Crude.
Oil Prices, especially the OPEC Agreement faces numerous challenges in the year 2018.