Brent Drops Under $60/bbl, But Iraq Says Oil Deal Prevented Bigger Losses

Traders and analysts express grave concerns over OPEC's efficacy moving forward. File Image / Pixabay

Analysts who doubted the Organization of the Petroleum Exporting Countries' (OPEC) influence on the crude market were validated on Monday, as U.S. crude prices plummeted 3.1 percent - despite the cartel agreeing upon what is perceived to be a much-needed output cutback.

West Texas Intermediate crude ended Monday's session down $1.61, or 3.1 percent, at $51 per barrel, while Brent dropped even further, by $1.68, or 2.7 percent, to $59.99 per barrel.

Prices rose on Friday after it was learned that OPEC and some allies, including Russia, would cut oil supply by 1.2 million barrels per day (bpd); but despite Morgan Stanley saying the cut was "likely sufficient to balance the market in 1H19 and prevent inventories from building," this line of thought was apparently outweighed by that of NBD bank, which believes the cuts aren't deep enough and predicts a market surplus of around 1.2 million bpd in the first quarter of next year.

That sentiment continued on Monday, with Bank of America Merrill Lynch stating in a note,"The surge in U.S. supply in recent months should be a reason for caution."

For its part, Goldman Sachs said there is considerable uncertainty over the efficacy of the OPEC deal, given it doesn't specify country allocations and exempts Libya, Venezuela, and Iran from the cutbacks.

Of course, traders' concerns are exacerbated by persistent signs of a slowing global economy, the latest of which came on Monday when Japan, the world's fourth largest oil consumer, revised its third quarter GDP growth down to minus 2.5 percent, down from the initial estimate of minus 1.2 percent.

However, as crude continues its price slide, Thamer Ghadhban, oil minister for Iraq, was on hand to suggest on Monday that if OPEC had not cut production, prices would have dropped to $45-$50 per barrel.

Speaking at a ministry event in Baghdad, he also predicted prices will rise over time - but presumably not with any great help from his country, as he went on to say that weather conditions were responsible for the recent decline in Iraqi exports and that "Our goal is to reach an export capacity of 6.5 million bpd, but over several stages."

Even though the notion is all but dead in analytical circles, Wood Mackenzie forecast a tightening of markets in the third quarter of next year, with Brent back above $70 per barrel - and warned that the cuts may be too much.