Oil Could Fall To $40 If OPEC Fails To Deepen Cuts

Oil jumps amid hopes for further OPEC cuts China factory growth

The Organisation of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, are discussing a plan to increase an existing supply cut of 1.2 million barrels per day (bpd) by a further 400,000 bpd and extend the pact until June, two sources familiar with the matter said. "There is a big stock build in the first half of the year - we need to keep an eye on that". US West Texas Intermediate crude CLc1 rose 44 cents to $ 56.40 per barrel.

Empirical evidence has demonstrated that a 1 million bpd surplus of oil can be expected to cause an oil price decline of around 5% per month, implying a potential drop of 30% over six months.

On Friday, prices plunged partly because the hopes of a bullish outcome from the meeting had faded after reports that Russia's energy minister signaled that Russian Federation is likely to request a change to the current agreement among OPEC+ to curb output in an effort to boost crude oil prices.

However, RBC Capital Markets said there's no widespread enthusiasm for a deeper reduction among OPEC members at this time, though if prices were to move appreciably lower in the immediate run-up to the meeting, a cut in the 1.6 -1.8 million bpd range could come under serious consideration. However, we gave back a bit of those gains and now it looks as if we are going to be more likely to test this uptrend line again.

OPEC ministers meet in Vienna on Thursday and the broader OPEC+ group gathers on Friday.

Russia, the world's second biggest oil exporter after Saudi Arabia, also benefits from a higher oil price and has been working with Opec on cuts to prevent an oil glut building as a result of booming production from the United States, which has climbed to become the world's crude producer. "The outlook will be bleak if OPEC+ fails to agree on additional cuts".

A healthy share price will still depend on strong global oil prices, which threaten to slip next year because of a glut of global oil supply relative to shaky energy demand forecasts.

The OPEC minsters believe relentless USA oil production growth will slow rapidly next year. Some in the group are wary measures to support prices will encourage more US production.

OPEC countries should administer deep cuts at their meeting in Vienna this week to avoid a plunge in oil prices, according to a research consultancy.



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