OPEC meet a step forward, but uncertainty still looms

The OPEC meeting has come and gone and with no decision taken with regard to a freeze or ceiling on crude supplies, but the fact that all the members spoke same language and there was no discord like at the Doha meeting in April is a step up.

And the crude prices have taken it well in its stride. Saudi Arabia showed restraint and so did Iran. The statements from Saudi Arabia pledging not to flood the markets was seen as a responsible one.

In the past few years, the OPEC (Organization of the Petroleum Exporting Countries) has been losing its influence in the market for a couple of reasons. One is the mistrust and lack of discipline within the OPEC members and the other is the rise of the non-OPEC supplies. In the past, a statement would be enough to put oil markets on track. That isn't the case now. The increase in supplies and market share of non-OPEC producers like Russia and US has been in favour of consumers with each trying to offer discount to keep the buyer. The OPEC would want to get its mojo back, restore group unity and be taken seriously. The OPEC minister's statement that the cartel may not manage the oil markets in the traditional way and not go with price targets does make one sit up and notice the change in the way the oil-rich countries may now want to hold their position.

In the last 18 months, the OPEC has abandoned the output ceiling when members stopped adhering to the quota. And they started following the strategy of squeezing out rival producers by increasing supplies. While crude prices in recent days have taken strength from unplanned outages due to Canada wildfires and unrest in Nigeria, Libya and Venezuela, the strength also comes on back of decline in free capacity with OPEC members. Even demand from Asia has been gaining and is expected to increase 3.5 percent on-year. 

The OPEC seemed confident of a balance already in markets as has been depicted correctly by the prices, which have gained from 13-year lows to 2016-highs. The shrinkages in investments in the sector are also expected to lead to shortages in future.

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Manisha Gupta

Commodities Editor|CNBC-TV18

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The prices though may trade around the current levels or even see some correction before making any significant gains from here as Iran continues to boost output trying to get back to pre-sanction levels and as the recent temporary outages start coming back on track. From the current levels of USD 50 the prices may vary a USD 5 on each side depending on what the supply situation is. In the meanwhile, volatility and uncertainty would continue to be part of oil trade.