In recent months, the global oil market seems to bear a resemblance to some kind of international chess match.
In recent months, the global oil market seems to bear a resemblance to some kind of international chess match.

In recent months, the global oil market seems to bear a resemblance to some kind of international chess match. On one side is North America, particularly producers in the U.S. who have quickly grown their exporting efforts. On the other side is OPEC, a globe-spanning conglomerate constantly working to maintain a grip on the world’s oil market.

As hard as each side is trying to outmaneuver the other, the basic rules of the market keep dealing their own setbacks. The Wall Street Journal reported March 9 that U.S. crude inventories remained at historically high levels despite a major effort to move as much of the product overseas as possible.

While high inventory prevents North American producers from selling their oil for as much as they would like to, it’s also a great bargaining chip to use against OPEC as it moves to scale back its own production. Ever since December 2016 when the group and several other non-member nations including Russia agreed to drastically reduce their total oil output, oil prices haven’t moved favorably. Data from OPEC shows that the nations that signed onto the deal have been reducing their output, but not by enough to make a significant difference in the market.

The result is U.S. inventory that continues to stay full, while OPEC and other nations take increasingly bigger losses. News on March 8 that American crude inventory levels reached a new weekly record (528.4 million barrels) sent oil prices down more than 5 percent in a single day. According to The Wall Street Journal, this represented the biggest one-day oil price shock seen in at least a year.

“Low crude prices scared the stuffing out of the oil industry,” oil executive Robert McNally told The Wall Street Journal. “What we have now is a collection of terrified producers who fear another price bust.”

OPEC optimism fades

Less than a week later, the price of crude in both North America and Eurasia remained mired in unremarkable territory. Bloomberg reported that Brent futures contracts were selling for $51.35 per barrel in London March 13, while West Texas Intermediate contracts in Houston settled at $48.40 per barrel.

Many analysts from both North American and OPEC’s differing perspectives have agreed that oil needs to rise above $50 per barrel and stay there for either group to see the kind of fiscal security it has grown used to.

“It’s all about the short-term glut that we have to deal with today, with the potential shortage months down the road,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, told Bloomberg. “For the market to establish the fact that it has finally hit bottom, we really have to get the price of oil back above $50 a barrel, which is still a tall order at this point.”

Still, North American producers continue to drill at a faster and faster pace. Bloomberg noted that drilling rig counts in the U.S. and Canada have been on a continuous growth streak since June 2016, even as the price of WTI has remained volatile. According to most analysts, it’s likely that North American producers will continue to squeeze the market as much as possible in an attempt to gain more leverage over OPEC, which has traditionally held the most sway in global markets.