OPEC United Against Cheap Oil

OPEC United Against Cheap Oil

TEHRAN, — OPEC recently decided to extend its hard-won oil output cuts deal for nine more months up to March 2018.

The decision by oil producers was adopted at a time the market is faced with supply glut. Due to the oversupplied market, oil prices have been halved in recent years, damaging revenue of oil producers.

In addition to the 14-member Organization of the Petroleum Exporting Countries, 11 non-OPEC oil producers including Russia have cut their production since January. This production cut drove oil prices back to above $50 and oil producers once again saw economic improvement. Many of these countries like Saudi Arabia and Venezuela were heavily dependent on black gold sales.

Start of Game

The downward trend in oil prices started in 2014, forcing Saudi Arabia and Russia to streamline their public budget. That also triggered unrest in Venezuela and Nigeria. But this year oil prices have pushed US shale oil industry to become more active. The US has not joined the OPEC-NOPEC oil cuts deal and that would slow down the trend of market balance.

Last December, OPEC made a historic decision after years of disagreement to reduce their production level. It was the first deal reached between OPEC and non-OPEC producers led by Russia in 15 years.

Both parties to the agreement agreed on reducing their output by 1.8 mb/d (2% of world total production) in the first half of 2017.

Most of these countries chose the level of production mentioned in the October 2016 deal as the starting point. Official figures show that in April ten countries fulfilled their obligations. Nine other countries reached their objectives in March. Large producers are more influential in the exercise of this deal. Saudi Arabia, the largest producer of OPEC, has been in full compliance with the OPEC deal since its implementation in January. Libya and Nigeria were exempted from production cut, while Iran was allowed to raise its output.

But non-OPEC producers were facing challenges. Russia, which accounts for half of non-OPEC cut, said it would go ahead with the agreed cut gradually. Non-OPEC states were 69% compliant with the deal in April. However, the International Energy Agency (IEA) put this figure at 66%.

Speculation for Extensional

Despite the output cut, OPEC kept exports fairly stable in the first half of 2017 as its members sold oil from stocks.

The move kept global oil stockpiles near record highs, forcing OPEC first to suggest extending cuts by six months, but later proposing to prolong them by nine months and Russia offering an unusually long duration of 12 months.

“There have been suggestions (of deeper cuts), many member countries have indicated flexibility but … that won’t be necessary,” Saudi Energy Minister Khalid al-Falih said before the meeting.

He added that OPEC members: Nigeria and Libya would still be excluded from cuts as their output remained curbed by unrest.

Falih also said Saudi oil exports were set to decline steeply from June, thus helping to speed up market rebalancing.

“Russia has an upcoming election and Saudis have the Aramco share listing next year so they will indeed do whatever it takes to support oil prices,” said Gary Ross, head of global oil at PIRA Energy, a unit of S&P Global Platts.

OPEC has a self-imposed goal of bringing stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion.

“We have seen a substantial drawdown in inventories that will be accelerated,” Falih said. “Then, the fourth quarter will get us to where we want.”

The Saudi energy minister separately told executives in Houston that its participation in an international agreement to cut crude output was reinvigorating rivals in the US shale patch.

He acknowledged that Saudi Arabia had a hand in “watering of the green shoots”, and welcomed the return of investment in US shale.

He added: “I am optimistic about the global market outlook in the weeks and months ahead, though I caution that my optimism should not tip investors into irrational exuberance or wishful thinking that OPEC or the kingdom will underwrite the investments of others at our own expense.”

The US, which is the largest producer of oil, is locked in rivalry with Saudi Arabia and Russia. Shale oil has seen significant growth in recent years and it needs to arrange its condition in coming years.

The OPEC, non-OPEC deal to cut production will help rebalance the market, but it will not significantly improve prices.

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