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What Is Really Pushing Oil Prices Down?

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Gaurav Agnihotri: 19 Sept 2016

Oil prices fell last week after the IEA and OPEC reported in their respective oil market reports that the supply-demand rebalancing of oil will take longer than market expectations. The WTI (WTI) and Brent were down by almost 2% and were trading at $43.3 and $45.77 at the time of writing this article. Even the U.S rig count increased for the 12th week in a row. Oil prices are going down as markets have realized that global oil supplies are only going to increase in the coming time. “It really looks similar to the period of the early 1990s, when we were at $20 oil. Is $45 to $50 the new $20? I am not ready to say we are in this new equilibrium environment, but it sure does feel like we’re moving in that direction,” said the head of commodities research at Goldman Sachs (NYSE:GS), Jeff Curie. It must be noted that investment firms such as Goldman Sachs have started lowering their 2017 forecast for oil prices. Let us look at those factors that are putting downward pressure on oil.

OPEC Members like Nigeria and Libya are unwilling to ‘freeze’ their production levels

Russia’s President Vladimir Putin had given a major boost to oil prices on September 2 when he said that Russia and OPEC must agree to freeze their oil production. Although Iran never indicated that it may concede to freeze its oil production, the country’s President Hassan Rouhani gave a fresh statement on Sunday, 18th September, “instability and falling oil prices are harmful to all countries, especially oil producers. Tehran welcomes any move aimed at market stability and improvement of oil prices based on justice, fairness and fair quota of all the oil producers.” From this statement, it seems that Iran may ‘co-operate’ with Russia and other OPEC members during the upcoming informal meeting in Algeria. But now, there is a new roadblock for this deal. A top Libyan official said on Saturday, 17th September, that his country will not freeze its production level until the output reaches 1.6 million barrels per day seen during the Gadhafi era. Even Nigeria seems to be shying away from the potential oil freeze deal between OPEC and Russia. OPEC’s General Secretary Mohammad Barkindo, who happens to be from Nigeria, said “It will be an informal meeting. It is not a meeting for making decisions. We met in June, it is September now and a lot of things happened between the two dates.”

What does this mean?

This means two things. First, if Nigeria and Libya refuse to co-operate during the upcoming OPEC-Russia meeting in Algeria, then these informal talks will be a complete failure. Next, it needs to be noted that both Nigeria and Libya are suffering from internal economic and security crisis and both countries need to increase their oil production. Libya is aiming to increase its domestic oil production (from the current 292,000 barrels a day) to 1 million barrels a day (by the end of 2016), after its oil exporting ports went under the control of a militia leader who is willing to increase oil production. On the other hand, Nigeria is looking to ramp up its production beyond 2 million barrels a day after militant group, Niger Delta Avengers, declared a ceasefire last week.

Takeaway

Companies like Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) and Exxon Mobil (NYSE:XOM) are now preparing to resume their Nigerian crude supplies. Exxon Mobil has even declared that it will resume the shipments of its Qua Iboe crude oil. Looking at the above factors, there is a high probability that both Nigeria and Libya will increase their production levels in the coming time. This will not only affect the upcoming OPEC-Russia deal, but will also add to the global crude oil surplus and put downward pressure on oil prices (NYSEARCA:USO). Investors must note this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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