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Pending OPEC Talks and Short Covering Boosts Prices
By Isaac Ndegwa
Oil prices rose further for a sixth consecutive day with the Brent crude prices touching levels above $50 for the first time in over a month and a half. The price jumps have been experienced as information emerged pointing towards a meeting between some of the biggest world crude oil producers. The major oil producers are likely to discuss a deal to control or even freeze production levels so that they can have better prices for the oil. Brent crude oil ended Thursday’s trading session at $50.89, a 2.09% jump. US crude closed 3.06% up at a new two month high of $48.22. Bullish frenzy in the energy markets
Crude oil had however made some worrying lows in August and the current highs just show an approximate 20% gain from the lows. The OPEC and other major producers from outside the OPEC have revived the talks surrounding a meeting in Algeria mid September. Oil remains in a bull market for the moment as short covering activity from institutional investors and hedge funds adds more to the bullish frenzy, because their positions had previously been at bearish records. OPEC members had previously experienced economic decline owing to the price declines in 2015 and 2014. The only thing that could show how different the countries reacted to the oil slump included the reserves and the cost at which the oil is produced. The Gulf exporters posted very low output costs.
The Oil sector has remained under the media microscope with many pundits and tabloids alike posting various scenarios that may play out when the sides meet. What remains constant however is that both sides of suppliers accept that the oil industry needs investment from outside itself. Traditionally, bigger oil companies have financed smaller companies and sold them off and that meant a lot of “financial inbreeding”. Non-Gulf exporters are also expected to push for a production freeze just so that global output does not exceed demand. The crude inventory levels released by the EIA early this week showed a stable oil inventory.
Will freezing production at its current levels boost price?
Some analysts are suggesting that it will be difficult for the OPEC members and the other exporters to come towards an agreement to halt production for a certain period. A total freeze is almost impossible but reductions are more likely. However, skeptics argue that it would be unfair for the oil producers to all have to cut down their production by an equal figure. A lot more could be achieved if there was a ‘pro rata’ distribution of how each member would cut down the output levels.
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By Isaac Ndegwa
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