Crude Oil Price: The Problem, Solution, And The Bigger Problem For OPEC+

Crude oil price rallied by more than 2% as OPEC+ leaders made a deal with Iraq on supply cuts. There was doubt that the upcoming meeting will not take place because of supply cheating by the likes of Iraq and Nigeria.

The problem

As you recall, OPEC+ members agreed to slash production in May with the goal of rebalancing the supply and demand dynamics. In total, the members agreed to slash more than 10 million barrels per day. Since then, the daily supply cuts have been bigger than that because many oil drillers have shut down their wells.

For example, in the United States, drillers have reduced the number of active wells at the fastest rate in history. The wells stand at slightly above 200, which is lower than the more than 600 that were there in January.

The challenge for OPEC+ members has been compliance. Several countries have simply not reduced the amount of oil they produce. The worst culprits are Iraq, Nigeria, and Kazakhstan.

For example, while Iraq agreed to slash more than 929 million barrels, it actually slashed about 311 million barrels. Similarly, while Nigeria agreed to slash 365 million barrels, it cut only 87 million barrels. The same was trend with Kazakhstan and Angola.

Cheating OPEC Countries

Cheating OPEC Countries
Cheating OPEC Countries

The solution

Crude oil price rose after Saudi Arabia and Russia reached an agreement with Iraq to stop shirking its cuts. The country agreed to compensate for the oil that it exported. Still, the biggest challenge will be whether these countries will be compelled to comply. This is because in the past, they have all been accused of not complying to the deals.

The members will now meet tomorrow to deliberate on the supply cuts. According to Bloomberg, they have all agreed to slash production for several more months. The amount of these cuts will start declining in the coming months.

The bigger problem for crude oil price

The biggest problem for OPEC is that higher oil prices will incentivize ailing American shale producers to come back to the market. Extremely low oil prices would have forced more companies into bankrupt. Among the biggest names to consider bankruptcy was Chesapeake Energy.

Other companies that filed for bankruptcy like Diamondback and Whiting Petroleum have said that they will return to the market if oil prices stabilize. According to Fitch, lower oil prices would have led to a default of junk bonds worth more than $43 billion.

Therefore, as American shale producers come back online, it will lead to more supplies at a time when demand is crawling back to life. This will in turn affect crude oil price.

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Crude oil price technical outlook

Brent crude oil price has been in an upward trend and is now trading at $41. On the daily chart, the price has just moved above the 100-day exponential moving averages and is slightly below the 50% Fibonacci retracement level. The RSI has just moved above the overbought level of 70, which implies that the price may continue rallying because it is not extremely overbought. Therefore, the rally may continue as bulls attempt to test the 50% retracement at $43.55.

On the flip side, a move below $37.38 will invalidate this trend. This price is below the psychological level of $40 and is along the 38.2% retracement.

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