Exactly, a week after the OPEC and Russia announced a combined supply cut of 1.2 mn bpd, the price of Brent crude has hardly moved. Normally, such an aggressive cut should have led to a spurt in crude prices. What explains this anomaly?
All about slowdown worries…
One possible reason for this reaction could be that the markets are still skeptical about the impact of a global slowdown. The trade war between the US and China continues to flicker and that is not good news. Markets worry that if the trade war becomes a currency war then oil demand could be the worst hit. That is more so considering that the biggest demand for oil comes from Asian economies where the currencies are the most vulnerable. Normally, it has been seen in the past that when the global growth falters, then oil demand is the first casualty. If that were to happen then the demand supply equation may reverse.
About the influence of OPEC
There is a larger question that is at stake here. The market share of OPEC has fallen to below 40% for the first time in its history. It is only likely to get worse as the US, China and Canada are pumping oil at historically high levels. The cartel was successful in 2016 purely because of the support of Russia and Mexico. It is not too clear how long they will continue to support this supply cut move. In fact, if the prices don’t firm up quickly, it will be difficult for Saudi Arabia to sell the idea of supply cuts to Russia as well as to its own OPEC members. Indonesia left the OPEC in 2008 and Qatar has left the OPEC recently. If Iran and others do not see much value and influence in the OPEC, they may opt to walk out too. That will further reduce the influence of OPEC. The markets are worried that due to its falling influence, the OPEC cuts are unlikely to have a major impact on oil prices. At least, in the first week, that appears to be playing out! ©