The aim of the OPEC and allied oil producers to increase global crude prices by reducing output as unveiled last week could fail.
According to the International Energy Agency, a global supply glut will potentially be prevented by the increased production cuts as agreed to by the oil cartel and other major producers including Russia.
The agency said that in the first quarter of next year, there could still be a surplus of 700,000 barrels per day even if all of the countries participating the increased production cut the remain committed to the objective that was decided in Vienna and if there is a drop in oil supply from other countries as well.
Its global oil demand growth forecasts for 2019 and 2020, was kept unchanged by the Paris-based International Energy Agency at 1 million and 1.2 million barrels per day respectively.
“The market has done its own sums and the reaction to oil’s new deal has so far been muted,” the agency said in its monthly report for December.
This forecast is not good news for the largest oil exporting company of the world Saudi Aramco which finalized its blockbuster IPO last week and its success at the stock market will be dependent on a strong global oil price.
On Thursday, the stocks of Saudi Aramco gained 10 per cent for a second consecutive day in Riyadh as the company briefly became the world’s first $2 trillion company on Thursday.
The lion’s share of the total production cuts by OPEC has been done by the cartel’s largest producer Saudi Arabia ever since the OPEC started cutting down on production in 2017 to shore up global oil prices. However despite the efforts of OPEC and other oil producing countries, the prices have remained low at around $60 a barrel which has prompted the latest production cut plan by them.
A target to cut down production by an additional 500,000 barrels per day from January 1 was greed to last week by OPEC and its allies. With this cut the total output reductions reached 1.7 million barrels daily.
It is expected that this latest cut will be extended beyond its current expiration date in March, said UBS analysts.
The supply surplus could be addressed by continuing this deal through 2020, UBS said but added that it is likely that Brent prices would remain below $70 dollars per barrel because of continued uncertainty over factors including surging US shale production.
UBS said that there can be non-OPEC investment in oil if the production cuts that are too deep or are continued for too long. Such investment is most likely in the United States which would increase the instability in the market.
Over the past decade, a dramatic increase in shale oil production has helped the US ot more than double the production of oil.
The International Energy Agency said that in September this year, the US exported more oil than it imported and became a net exporter of oil for the first time in history of the country. it added that this could become commonplace starting late next year or in early 2021.
(Adapted from CNN.com)