Fracturing Continues to Sabotage OPEC, Oil Prices Plummeted 7 Percent Last Week

Oil prices in global markets fell 7 percent last week, marking their largest weekly loss in over a month, a consequence of further production increases in the U.S.

On the London market, the price of a barrel at the end of trading on Friday was $51.96, which is 7 percent lower than a week earlier, while on the American market, the barrel dropped 6.7 percent to $49.62.

The largest weekly drop in the price of ‘black gold’ in over a month is a result of further production increases in the U.S., indicated by high levels of oil inventories in that country and data showing an increase in the number of drilling rigs.

The number of these rigs reached 688, the highest level since April 2015, and this is also double the number from a year ago.

U.S. production has jumped nearly 10 percent since mid-2016, to 9.25 million barrels per day, which is close to the exports of the world’s leading producers, Saudi Arabia and Russia.

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-Further increases in U.S. shale production continue to sabotage OPEC’s and other producers’ efforts to stabilize the oversaturated market, says Lukman Otunuga from the brokerage firm FXTM.

As the recovery of U.S. production has stretched into the 11th month, OPEC’s efforts aimed at reducing production to narrow the gap between excessive production and insufficient demand are not yielding the expected results.

As a result, investors were not encouraged by the news that the technical committee of the Organization of the Petroleum Exporting Countries (OPEC) and producers outside the cartel recommended on Friday to extend the production cut agreement for the first half of 2017 into the second half.

Reports indicate that most OPEC members, as well as the largest producers outside the cartel, are adhering to the agreement to reduce production in the first half of the year by a total of 1.8 million barrels per day.

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However, the U.S. is not a signatory to last year’s production cut agreement, so it is taking the opportunity to market its oil and increase its market share.

Therefore, massive global oil inventories are not significantly decreasing, and at the end of May, OPEC will decide whether to extend the production cut agreement into the second half of the year.

Saudi Arabia and Kuwait, key OPEC members, have stated that they want to negotiate an extension of production limits into the second half of the year with producers outside the cartel.

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However, Russian Energy Minister Alexander Novak declined to say whether Russia would agree to an extension before the joint meeting on May 25, noting that global inventories are decreasing.

-The situation has gradually improved since the beginning of March, emphasized Novak.

-Cuts, even if extended, will not change much, is the pessimistic view of Sukrit Vijayakar from the consulting firm Trifecta, who adds that increased crude oil inventories are the main reason for the oversaturation.

Due to increased production in the U.S., analysts believe that OPEC’s production cuts will have less impact on the market than previously estimated, and that prices will move within a relatively narrow range in the coming weeks, except in the case of unexpected events and supply disruptions.