After a year of facing tough economic consequences caused by the severe decline in global Oil prices, OPEC is finally on the cusp of choking of growth in US Crude output. US output is almost back down to it’s level a year ago as shown by the chart below:
The significance of this lies in the fact that it was following a meeting last November that the Organisation of Petroleum Exporting Countries (OPEC) decided to not offer support to Oil prices already suffering heavy declines and kept their level of output constant. The move in the following months saw further selling with prices hitting a low just above $40 a barrel in early 2015.
The reasoning behind OPEC’s bold move lay in an attempt to reclaim market share from it’s US competitors, as the States became a net exporter of Oil for the first time in half a century. This shift away from being an importer has been a long time coming and has arguably been in the pipeline (crude pun) since the Iranian revolution in the late 1970’s.
What weighed heavily in OPEC’s favour, and made this strategic move possible, was the cost of production in the US being relatively far more expensive per barrel. Therefore through not decreasing supply at the bi-annual meeting in Vienna last November, as was widely expected, members of the international organisation had the desired effect and sent prices plunging.
This has led to many closures of US Oil rigs, as shown by the weekly Baker Hughes rig count which is released at 18:00 BST every Friday. The number of active rigs has roughly halved in the past year, showing the desired outcome for OPEC.
That being said it’s not been easy for members of OPEC as shown by news today that Saudi Arabia risk draining all their financial assets within 5 years, should Oil prices remain at current levels. This has led to the government of the oil-rich kingdom being forced to raise funds by accessing the bond markets for the first time since 2007.
This afternoon’s DOE inventories will be released at 15:30 BST