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The WTI crude oil price was up nearly 3.3% at one point on Monday, a new high for 2016. Brent crude prices have also surged to a new 2016 record. The price of Brent crude oil is $56.04 a barrel, up 3.15%.
Since the OPEC agreement last month, the price of oil has continued to rise. WTI crude oil prices have risen 17.8% since the Nov. 30 OPEC meeting, and the Brent crude price has jumped 21.1% in the same time.
The chart to the right shows how crude oil prices have soared since the Nov. 30 agreement.
The landmark agreement – the cartel’s first since 2008 – will lead to a cut in oil production from member countries. By cutting production, the cartel will be able to better control oil supply and push oil prices higher. That’s why the agreement injected a dose of optimism into oil markets.
But oil prices today have continued to climb since the agreement was announced. Here’s why…
Why the Price of Oil Today Is Up
Even though OPEC agreed to cut oil production on Nov. 30, the cartel still needs other countries to participate for the plan to work.
Our oil price prediction says the OPEC agreement could lead to $60 a barrel in 2017. But Dr. Kent Moors, Money Morning‘s Global Energy Strategist, said Russia’s participation was one of the biggest obstacles standing in the way of higher crude oil prices.
On Saturday (Dec. 10), Russia agreed to cut its oil production by 558,000 barrels a day.
Russia, the world’s second-largest oil producer, is a necessary participant for the OPEC agreement to be successful. While Russia was initially part of the OPEC agreement in Algiers on Sept. 28, it had not participated in an OPEC production cut since 2001. Russia had also become less involved in negotiations leading up to the Nov. 30 meeting.
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Russia was expected to cut 660,000 barrels a day, but its 558,000 barrels a day is still the largest cut made by a non-OPEC member ever, according to CNBC. That has oil traders even more optimistic.
And it wasn’t just Russia that signed on. Non-OPEC members who agreed to work with the cartel included other major oil producers, like Oman, Bahrain, Mexico, and Malaysia.
While Russia and other non-OPEC members agreeing to participate is good news, there are still plenty of obstacles ahead for higher crude oil prices…
More Obstacles to Higher Crude Oil Prices
There are two primary obstacles standing in the way of OPEC managing a $50 price floor.
First, OPEC has no way to enforce its agreement. Member countries participate because they want to cooperate and believe it is in their best interest to cooperate.
Higher oil prices would be good for all participating countries over the long term. But for cash-strapped countries like Iraq, pumping as much oil as possible is the only way to keep money flowing in the short term.
The New York Times reports Iran is scrambling to sign oil production agreements with Western oil companies before President-elect Donald Trump takes office. Trump has threated to tear up the agreement lifting Western sanctions on Iran, and Iran hopes to reach as many agreements before that happens as possible. If new U.S. sanctions are placed on Iran, it will likely be encouraged to produce as much as possible out of necessity.
And if either Iran or Iraq were to flout the agreement, the other would likely follow suit, torpedoing the agreement.
If this happens, OPEC has no way to enforce the agreement and make these countries start participating again. OPEC’s largest oil producer, Saudi Arabia, has traditionally threatened to flood the market with oil, crashing the price of oil, as a way of keeping OPEC members in line. But if it comes to this, the deal will be dead.
Second, higher oil prices will encourage increased oil production. If more oil comes into the market, OPEC will have to fight an uphill battle to keep prices up.
The United States is the world’s largest oil-producing country and is not participating in a production cut. American oil companies are free to produce as much as they want. And one of the limitations of American oil production has been cheap oil.
If OPEC is successful in raising the price of oil, this could lead to American oil companies pumping more oil.
Reuters reports American oil companies added 21 oil rigs last week, the most in one week since July 2015. And American shale oil production could also increase with higher oil prices. Currently, shale oil is not profitable below $50 a barrel. But with higher prices on the way and increased efficiency bringing costs down, shale oil could undermine OPEC’s agreement.
The American energy market has also been shaken up by the recent election. Investors are anxiously waiting to see if President-elect Trump’s proposed policies will create new opportunities.
But you can get a leg up on the markets. Money Morning Global Energy Strategist Dr. Kent Moors says Trump will have a big impact on this American energy sector, but it isn’t the one you expect.
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