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Should OPEC Abandon Its Current Oil Price Strategy?

If OPEC was a person, you’d recommend either therapy or that it cut its losses and start licking its wounds.

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As Bill Baruch, chief market strategist at iiTRADER told, “OPEC threw the kitchen sink at the market, trying different statements that ranged from extending cuts past the end of 2017 and deepening cuts – nothing worked.”

It’s largely due to the increase of over 10 percent in U.S. output since 2016Q3; stocks are at 527.8m barrels which is at the higher end of expectations for this time of year.

However, shale isn’t the sole source of pain – Libya has also achieved its highest level of production since 2014 at almost 800,000 pbd, thanks to two fields – the El Feel and Shahara. It’s a far cry from the 1.6m bpd it was pumping before the 2011 uprising but it cuts into the impact the overall OPEC agreement could have.

Everything gained since the production curing deal was struck has now vanished. And it’s far from clear what can be done to bring it back. Concern over a reduction in demand, the rising U.S. dollar and increasing U.S. crude output is casting doubt in OPEC’s ability to have any positive market impact. Despite Saudi Arabia’s dramatic commitment, suggesting that it “would do whatever it takes” to rebalance the market, prices have continued to slip.

Norbert Ruecker, head of macro and commodity research at Julius Baer, was unable to see any silver lining when he told “U.S. oil production surpassed expectations in terms of an early bottoming and swift uptick, and is set to expand further based on the latest drilling momentum. We see prices between $45-50 per barrel as fundamentally justified.”

As if raising U.S. oil production forecasts for 2017 weren’t enough, the Energy Information Agency has predicted the same for 2018, as well. It’s also readjusted its price estimates for prices in 2017 to $52.60 per barrel for Brent and $50.68 for WTI.

Leaving no room for confusion, EIA Acting Administrator Howard Gruenspecht said: “Higher oil production from the United States, along with rising oil output from Canada and Brazil, is expected to curb upward pressure on global oil prices through the end of 2018.”

There’s an important lesson from the Commerzbank analyst Eugen Weinberg. He told Reuters: “At some point, the market should recognise OPEC isn’t the most important player in the market any more. That is non-OPEC and above all, U.S. shale.”

The question we need an answer to is how far does the penny have to drop before someone notices it?