The price of crude oil continued its recovery last week on news of a reduction in oil production worldwide and positive economic news.
The Organization of Petroleum Exporting Countries (OPEC) released its monthly production report on Tuesday revealing a decline of 797,000 barrels per day (b/d) in January to 30.81 million b/d, which is just below its projections for oil demand in 2019.
OPEC members and some 10 non-OPEC oil-producing countries, which includes Russia, agreed in December to reduce oil production by some 1.2 million b/d (OPEC’s commitment is 800,000 b/d) in reaction to an oversupply that forced prices to drop some 40 percent in just three months.
Saudi Arabia had the largest reduction of 350,000 b/d, and Russia agreed to cut 230,000 b/d.
Additionally, crude oil production in Iran, Libya and Venezuela is expected to be less than current quotas, which should reduce supplies also.
U.S. oil production continues to grow, however. It is the largest oil producer with 11.9 million b/d. U.S. oil production hit a record low in October 2005 at 3.9 million b/d, but oil production from unconventional shale began with the technological developments of horizontal drilling and hydraulic fracturing. U.S. producers are not a part of the agreement to cut production.
The announcement that OPEC is in compliance with the December agreement was greeted with optimism from crude oil markets. The news confirmed to some traders that the oversupply would soon dissipate and demand would increase and prices would rise. Prices on the international exchange for Brent crude oil closed at $66.96 and $56.92 on the New York Mercantile Exchange on Wednesday, which is a 33 percent increase from the December low of $42 but still 25 percent lower than the October high 0f $75.
On the supply side, OPEC’s report predicted a reduction in economic growth of 0.2 percentage point to 3.3 percent this year, which will lower demand for petroleum products.
“Some recent positive developments could support the global economy at its current level, including the recovery in oil prices, possible progress in U.S.-China trade negotiations and less-ambitious monetary tightening by the U.S. Federal Reserve,” the report stated. “Nevertheless, this would not lift the global economy beyond the growth forecast.”
Alex Mills is the former President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.