CBA: This needs to happen to reverse the slide in crude prices

Photo by Jacob Silberberg/Getty Images

Crude oil is in a bear market, even with a modest rebound in prices overnight.

From the multi-year high of $58.57 a barrel struck on January 3, front-month Brent crude futures — the global benchmark — has lost 23.2%. WTI futures have also been hit hard, losing 22.5% over the same period.

Just have a look at the chart below to show the scale of the recent selloff.

Source: CBA

Not exactly the outcome OPEC and non-OPEC producers would have been expecting when they cut daily output levels back in November last year in an attempt to boost prices.

They’re now back to where they were when that deal was first announced, even with a nine-month extension to the cuts agreed upon around a month ago.

While some blame increased US production levels as a factor behind the price slide, to Vivek Dhar, mining and energy commodity analyst at the Commonwealth Bank, producers who pledged to cut output levels need to follow up those words with action if prices are to recover, particularly among non-OPEC nations.

He explains:

Two things need to be enforced if this OPEC-led deal is going to move oil prices back to $US50-60/bbl. Firstly, signatories need to comply with their production quotas. Output data in May showed that non-OPEC members were lagging significantly, with the group needing to sideline around 30% more supply to be fully compliant. OPEC members were not only better behaved but compensated for the indiscipline of non-OPEC nations, with members complying around 10% more than their agreed cuts. Secondly, producers need to ensure that production cuts translate across to export cuts. The fact that OPEC nations complied more than expected, but kept exports elevated via destocking is concerning. Their behaviour implied accordance at face value, but a disregard of the spirit of the deal. Saudi Arabia flagged in the OPEC group meeting that they will aim for an export focus. That is certainly good news, but the market is rightfully sceptical to take them at their word.

Essentially, many non-OPEC producers are still pumping too much crude, while OPEC producers are still exporting at a decent clip by drawing down inventory levels, making it harder to rebalance the market.

Dhar says that with OPEC and non-OPEC countries still keen to reduce global oil stockpiles, a decision on deeper output cuts will have to be considered “sometime soon”.

“We expect producers will lean towards deeper cuts later this year if prices continue to languish around $US40-45 a barrel.

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