Is Production Freeze a Good Solution for Oil Market?

PERSOL's Research and Development Department:

Is Production Freeze a Good Solution for Oil Market?

 

May 2, 2017

Iran's dependency on oil revenues has always been crucial; meanwhile, imposing a budget that rely on oil by 35 percent can lead to more economical unrest as a result of larger fluctuations in oil prices.

Since oil prices have dropped substantially in recent years and fell below $50 per barrel, OPEC members agreed in November 2016 to cut production by 1.2 million barrels per day for six months. Iran was exempt from the so called "Supply-cut Deal" in order to compensate the disadvantages came from US sanctions.

While the majority of experts saw the deal an increasingly hopeful measure to deter major suppliers from excessive output and boost prices finally, some other factors were at work to fill the supply gap and among them were producers not participating in the accord; Particularly, shale oil drillers in the US that seized the opportunity to increase output and exports and gain market share.

Following the increasing share of US from oil market, some analysts are even predicting that shale activity could eventually surpass Saudi Arabia's biggest oilfield. It is interesting to know that China has become the third-biggest overseas destination for US crude in the last year, which can be a potential danger for Asian oil producers and suppliers.

By these changes in the oil market, the prospect of oil prices is more unclear than ever. "Toktam Aynehkar", (commercial Manager of PERSOL in Oil & Gas sector) pointed out" Iran as one of the Oil supplying countries is more into refining and selling downstream products since economic sanctions raised against Iran. But as a matter of fact oil price is affecting downstream price and demand sharply. So this volume of volatility put the whole business in risk".

Thus, it is hard for country's suppliers to rely on fluctuating prices. The Organization of the Petroleum Exporting Countries (OPEC) meets in May to discuss oil supply policies, specifically the future of "production cuts". Iran has also announced readiness to join the accord. By the way the big question now is will a production freeze take hold?

 

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