The Organization of Petroleum Exporting Countries or OPEC met for its bi-annual meeting in Vienna, Austria on December 4th, 2015. The OPEC meeting was crucial and gained considerable headlines into the run up to the meeting as investors were keen to learn whether OPEC would come together to cut Oil production due to the supply glut which flushed the global economies with tremendous amounts of Oil and leading to a sharp decline in Oil prices.
However, much to the disappointment of many, the December 4th OPEC meeting was a non-event as the committee could not agree on cutting production and thus left the OPEC Oil production unchanged at around 31 million barrels per day, keeping the markets well oversupplied with Crude Oil.
Was there any expectation of a cut to Oil production at the OPEC meeting on December 4th 2015?
Timeline of Crude Oil into December’s OPEC Meeting
*Note: The above chart is overlayed with the US Dollar Index (grey line, left axis)
In order to better understand the fall in Crude Oil prices a bit of context is necessary. It was in June 2014, at the OPEC’s 165th meeting that the floodgates were kept open to keep the markets over supplied with Crude Oil, at a rate of 30 million barrels per day. Prior to the OPEC meeting, Oil prices were trading within the range of $110 – $92.5 a barrel and prices were largely stable. OPEC’s game plan was to simply keep the markets oversupplied in a bid to bring down Oil prices which would in return put pressure on the more expensive and inefficient Oil production companies in the US, whose primary method of drilling was based on the Shale Oil method. It was time for Crude Oil prices to turn to a cyclical bear market. Besides over production of Crude Oil, US Shale oil drilling started to pick up pace while at the same time slower demand from Europe and China kept prices well pressured.
— Forex Trading Online (@forexpromos) December 9, 2015
On October 1st 2014, Saudi Arabia, OPEC’s largest Oil producer announced that it was cutting prices for its biggest customers. The surprise move from Saudi Arabia showed that the OPEC was serious about taking back its market share and a bid to control Oil prices. Other OPEC countries were left with no option but to keep production levels at the peak in order to maintain their share of the Oil exports.
Since the June 2014 OPEC meeting and into the end of the year, 2014, Crude Oil prices fell by a massive 50%, trading at $52.69 a barrel.
The Oil markets however saw a reprieve as prices started to climb into early 2015 after bottoming out at $45.59 in early January.
Oil prices started a modest rally after OPEC released a report noting that the global economy would see a greater demand for Crude Oil in 2015. It noted that the demand for Oil would be around 29.21 million barrels per day in 2015, up by 430k from its earlier forecast. At the same time, the OPEC report cut down Crude oil supply from the non-OPEC markets.
The Oil markets continued to post a steady rally into the first two quarters of 2015. This was largely due to weaker US Dollar, which fell as the US economic growth hit a weak spot in the first quarter of 2015. With the Fed poised to hike rates the markets turned their attention to the US Dollar. The March FOMC meeting saw the Federal Reserve officials lower their economic growth and inflation forecasts while calling for more patience ahead of the decision to hike interest rates. The dovish FOMC meeting in March this year saw the US Dollar weakening strongly which in turn gave boost to a modest Crude Oil rally. Oil prices rallied nearly 33% since March and into May as a result. The rally was however short lived as the US economy continued to post strong growth since the second quarter which eventually led the markets to start pricing in a US Fed rate hike and thus boosting the US Dollar which in turn led to weaker Oil prices yet again.
Crude Oil falls on OPEC’s December 2015 Meeting
To be honest, the expectations weren’t high as the OPEC met in Vienna, Austria on December 4th. There was a modest speculation that something could be done to cut production especially after a few weeks earlier, Saudi Arabia announced that it was willing to negotiate with its OPEC partners to cut Oil production. But only within a few hours, there was disagreement with other OPEC countries including Venezuela on price cuts. With no clear agreement in sight ahead of the OPEC meeting on December 4th, the markets were well poised to see a no outcome from the meeting.
Ahead of the OPEC meeting, Oil prices were volatile, but since December 4th, Crude Oil fell -3.24% for the day after opening the day at $41.31 a barrel and testing the daily highs to $42 a barrel and closed the day’s trading at $39.97. When the markets reopened on Monday, Oil prices continued their slump and fell by a further 6.48% for the day to close near $37.63 a barrel. OPEC’s next meeting is due in June 2016.