Oil prices face some pressure ahead as it approaches its seasonal weak time of the year. I have posted the returns of US oil over the last 20 years between Nov 20 and Dec 20. You can see the distribution clearly favours sellers. The worst year was 2014 with a huge -27.12% drop in oil. Now, this seasonal pressure faces extra difficulty as OPEC+ tries to balance rising oil production levels.
Is OPEC+ to extend cuts?
According to the latest news on November 11, OPEC+ is talking about extending cuts for 3-6 months.
What’s the present production cut deal?
At present, OPEC has agreed on a production quota of 21.8mln bpd and is due to relax these to 23mln bpd next year. Libya, Iran and Venezuela are all excluded from the deal.
Three reasons OPEC+ may struggle to balance the market even with cuts?
It may be very difficult as a number of countries are bringing or will bring production back to the market.
Libyan oil production was reported to exceed 1.2mln bpd on November 13. They are said to be ready to comply with quotas when/if they hit +1.6mln bpd. This is a quicker-than-expected return to production by Libya, so they may hit 1.6mln bpd sooner rather than later.
Iran could return to the oil market if the Biden administration takes a more dovish approach to the Iran nuclear deal. Their current level of production is around 0.5 mln bpd. However, when the deal was in place it stood higher at 2mln bpd. If Iran turns on the taps, that makes it harder for OPEC+ again.
Iraq. Although OPEC production compliance was reported at 101% for October, Iraq may struggle to keep production quotas as it funds 97% of its state budget through its oil.
Also, a factor to consider is the potential time it may take for a vaccine to do its work. All of these reasons are potential drags on oil as it enters this seasonally weak time of year.