Oil’s plunge this week to levels not seen since November raises the stakes for the Organization of the Petroleum Exporting Countries when the cartel meets later this month to decide whether to extend an agreement to curb output.
June West Texas Intermediate crude CLM7, -0.22% on Thursday settled at $45.52 a barrel on the New York Mercantile Exchange, while July Brent LCON7, +0.06% finished at $48.38 a barrel on the ICE Futures exchange in London. Both benchmark crude contracts lost 4.8% for the session and marked their lowest settlements since Nov. 29, according to FactSet data.
On Friday, prices continued lower, before staging a rebound in European trade. Crude oil, however, was still looking at a 7.4% slump for the week.
Thursday’s slump means prices dropped to a more than five-month low—but even more important, crude was trading at prices seen before the Nov. 30 meeting in Vienna. That’s when OPEC members agreed to reduce production levels by about 1.2 million barrels a day for six months, at the start of the new year. OPEC also reached a pact with some nonmember producers who agreed to cut output by another 600,000 barrels a day.
Following the agreement, and early signs of historically-strong OPEC compliance with the pact, WTI prices climbed to as high as $54.45 and Brent to as high as $56.81 in February, according to FactSet data. Prices for both benchmark crudes have now fallen around 15% from those peaks.
Rising crude production in the U.S. and other countries that aren’t part of the output cut pledge are a key concerns because this can offset global efforts to erase the world-wide glut of supplies.
Meanwhile, OPEC member Libya had suffered intermittent production disruptions because of pipeline shutdowns tied to civil war in the nation. Risks to that production have eased as two of the largest factions in Libya made progress in reaching a deal to resolve the country’s political and economic crisis, BBC News reported Wednesday.
The leaders of two rival Libyan camps held talks earlier this week in the United Arab Emirates, promising to work to end the country’s crisis, according to a news report from Al Jazeera.
The talks indicate “progress toward unification,” said James Williams, energy economist at WTRG Economics.
“That would lead to much higher production than the current 700,000” barrels a day in Libya, he said. “A unified Libya could reach 1.5 million [barrels a day] in a few months.”
And Libya is one of two current OPEC members—the other being Nigeria—that is excluded from OPEC production quotas.
Aside from Libya potentially increasing output, “Russia commenting that it is not sure if it will continue its cuts, shale producers meeting or exceeding production guidance and not altering plans for the rest of the year, and continued weak anecdotal demand data,” have contributed to the latest drop in oil prices, said Brian Youngberg, senior energy analyst at Edward Jones.
In the near term, oil prices “remain volatile with a downward bias,” he said.
OPEC members plan to make a decision on a potential extension to the output reductions on May 25 in Vienna.
If OPEC and non-OPEC countries who are part of the production pact do not agree on a quota extension, WTI prices could drop back into the $30s, Williams said.
For now, prices for WTI could fall back to as low as $40 a barrel, he said. But “remember, many of the U.S. oil companies locked in higher prices, so U.S. production will continue to grow for several months even if prices go as low as $40.”