Oil prices will test $30 a barrel sooner rather than later

OPEC’s announcement sent ripples through wider markets and dented shares of USA energy drillers already suffering from low prices, but losses in oil futures were limited as prices hit support around $40 a barrel. Iran is on track to return to the oil market if, as expected, sanctions are lifted early next year.

“We’re in for another leg down”, Bill O’Grady, chief market strategist at Confluence Investment Management in St Louis, which oversees $3.4bn, said by phone.

America’s oil drillers have idled more than half the country’s rigs in the past year as the world’s largest crude suppliers battle for market share.

Iraq has also vowed to boost supply in the coming year. Saudi Arabia, OPEC’s biggest producer and architect of the current policy, has remained opposed to a production cut unless countries outside the group cooperate.

Iran won’t accept any production curbs until it restored about 1 million barrels a day of output, Oil Minister Bijan Namdar Zanganeh said on Friday before sitting down with his OPEC counterparts.

Saudi Oil Minister Ali Al-Naimi said he hoped growing global demand could absorb an expected jump in Iranian production next year: “Everyone is welcome to go into the market”.

James Williams at WTRG Economics said the prolonged interval before the next OPEC meeting indicates “they do not seem to think that there will be an agreement this spring”.

Surging oil production from non-OPEC nations like the US has created a deep divide inside OPEC.

By the time Opec meets again in June 2016 we will know more about the fates of Iran and the shale oil producers in the United States and whether or not oil prices have stabilised between $40-$50 a barrel. Opec has pumped more than its collective target of 30mn barrels a day for the past 18 months, data compiled by Bloomberg show. “The burden to adjust supply remains on non-OPEC producers”.

On Friday, OPEC said it would keep its production level unchanged, basically legitimizing the 1.5 million barrels a day it has been producing over its output ceiling of 30 million barrels a day.

He said that he felt that some Opec members did not want to act because it would upset the market further.

And with the market being horrifically oversupplied, this decision will drive oil prices even lower, further exacerbating storage issues.

The dollar rose, which would ordinarily depress oil prices as this strength can encourage non-US investors in crude to sell their holdings in exchange for a higher profit in their own currency.

Friday’s news pushed oil prices down, with the US benchmark rate sliding 2.7 percent on the day to $39.99.

While the Saudis can claim a partial victory over the USA shale oil boom, production from top non-OPEC rival Russian Federation continues to surprise on the upside and world oil stockpiles are at record levels.

With oil prices hovering near a six-year low, cash-strapped countries including Venezuela, Ecuador and Algeria are pressuring Saudi Arabia to cut production.