The likelyhood of crude oil sustaining its current price level, trading near 50 dollars a barrel, remains uncertain despite OPEC’s agreed production cut, according to an analysis by the International Energy Association (IEA).
The OPEC cuts have only been proposed for a six month period. It is a warning, the IEA says that is intended for oil producing countries that haven’t adopted new technologies to get oil out of the ground in cheaper ways.
The report says: “High-cost producers should not take for granted that they will receive a free ride to higher production. These high-cost producers, who assume that the cuts at the very least guarantee a floor under prices, might think twice before taking the risk of sanctioning new investments”.
Oil supply has outstripped demand over the last ten years.
OPEC defied odds on November 30th, herding its two biggest unwilling members Iran and Iraq into an agreement to curb production to 1.2 million barrels a day. West Texas Intermediate shot to $49.61 a barrel pushing through a major resistance point the next day.
Today Libya, Africa’s largest Crude oil reserve, announced it would return to production after political instability crippled its output. Since December of last year America has returned to the export game after 40 years of sitting on the sidelines. Venezuela holds over 300 billion barrels of crude in reserve.
Higher prices might come later in the year. The El Nino weather pattern which originates with higher than average temperatures in the Pacific, brings warm winters and low heating oil demand. Heating oil is one of the products that is refined from Crude. This particular El Nino was the third strongest ever recorded.
Mike Halpert, deputy director of the National Oceanic and Atmospheric Administration said in October that he predicted “a weak La Nina is in place and is likely to remain for the winter”. La Nina weather patterns that hold in the States are often responsible for producing hurricanes. Hurricanes, especially those travelling up the Gulf of Mexico, disrupt delivery to North America’s biggest refinery ‘Padd’- and it is during those events that prices soar.