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Analyst: OPEC’s Cuts Actually Destabilize Oil Market

Tsvetana Paraskova

Contrary to its official mission to stabilize the oil market, OPEC’s strategy is doing the contrary—the oil production cuts are destabilizing the oil market, Emirates NBD’s Commodity Analyst Edward Bell says.

The production cuts have thrown in a new variable of uncertainty in the market—how long these cuts would last, and how long the economies of OPEC members can afford the cuts to impact their production levels and revenues, considering that oil prices haven’t risen as high as the budget breakevens of many Gulf economies, Arabian Business quoted Bell as saying.

“So when we look at the track record certainly seems like OPEC is engaged is the act of market management in the last two years, but I’d say their actions have been rather destabilising towards the crude oil market,” Bell said.

The production cuts of the OPEC+ coalition have been partly, but not entirely successful, Bell says, as carried by Arabian Business.

OPEC and its Russia-led non-OPEC partners aim to rebalance the market and say that they are and will be working toward “market stability” every chance they get to speak to the media.

Even if they have managed to put a floor under oil prices, the current levels are way below the reported breakeven price for OPEC’s de facto leader and largest producer, Saudi Arabia of around US$80 a barrel.

With market sentiment pessimistic about oil demand growth and with rising U.S. crude oil production, Saudi Arabia needs to take action sooner rather than later to support oil prices at least around US$60 a barrel Brent, IHS Markit said last week.

Early data for August suggests that OPEC boosted both its production and exports last month.

Despite the signs that OPEC increased output and shipments in August, OPEC needs deeper cuts to support oil prices, and Saudi Arabia is determined to prop up prices, IHS Markit said on Thursday.

“The Kingdom will most likely proceed with further cuts in the months ahead, as the current price environment could risk the success of Aramco's IPO,” Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, at IHS Markit, said.  

By Tsvetana Paraskova for Oilprice.com

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