As West Texas Intermediate on Thursday dropped in price by 34 cents to settle at $53.54, analysts suggest that the Organization of the Petroleum Exporting Countries' (OPEC) cutback agreement – which earlier this week was heralded for achieving an 80 percent compliance rate - simply isn't enough to revive a tepid market.
According to a Bloomberg survey, OPEC cut output by 840,000 barrels per day (bpd) in January in an effort to achieve its stated goal of a 1.8 million bpd reduction; however, the survey also shows that Nigeria, Libya, and Iran, which aren't participating in the agreement, boosted production by a combined 270,000 barrels.
All told, OPEC's output is 550,000 bpd above its target, meaning it is only 60 percent towards reaching the 1.8 million bpd objective – which in itself has been criticized by analysts for being far too little to shrink global oversupply and trigger meaningful market stabilization.
Fereidun Fesharaki, chairman, FGE
The price of failure is $30 oil and a loss of credibility
Bob Yawger, director of the futures division at Mizuho Securities USA Inc., said, "Bloomberg data shows that OPEC needs to make additional cuts."
So far, the biggest effect of the cutbacks seems to be increased U.S. production activity: U.S. crude oil inventories rising last week by an unexpected 6.5 million barrels to 494.76 million (according to the Energy Information Administration) further exacerbate OPEC's efforts and are said to be the main reason for Thursday's poor market showing.
The only good news on Thursday was the perception that traders "have concluded the dispute between the U.S. and Iran over a recent missile test represents more of a war of words than the start of a military confrontation that would put supplies from the wider Persian Gulf at risk," according to Tim Evans, energy futures specialist for Citi Futures.
Those more concerned with where energy is heading in the long run are taking solace in a report from the Grantham Institute at Imperial College London and the Carbon Tracker Initiative, which warns that large energy companies adopting a "business as usual" attitude are underestimating the advances of low carbon technologies – and that a drop in the cost of solar and electric vehicles may cause coal and oil demand to peak by 2020.
The report goes so far as to predict that electric vehicle growth could result in the displacement of around 2 million bpd of oil by 2025 and 25 million bpd by 2050.
However, even the most ardent alternative energy boosters must concede that the world is stuck with fossil fuels for the time being, and in this context Fereidun Fesharaki, chairman of FGE, is hoping that OPEC will ultimately prevail in its cutback attempts, if for no other reason than to avoid further market drops.
He told CNBC, "The price of failure is unacceptable; the price of failure is $30 oil and a loss of credibility."
Earlier this week, Bill Baruch, senior market strategist at iitrader.com., echoed the sentiments of many analysts wary of the efficacy of the OPEC deal by stating that "U.S. crude could be in consolidation from $51 to $55 for a while, until there's more evidence on OPEC production cuts or more evidence of production picking up or stabilizing in the U.S."