By May 25, 2017 Read More →

OPEC supply cuts extended nine months to grapple with global glut

OPEC supply cuts

OPEC President, Saudi Arabia’s Energy Minister Khalid al-Falih, believes extending current levels of cuts for the next nine months will balance oil markets. Reuters photo by Leonhard Foeger.

OPEC supply cuts time line extended, no deepening of cuts

On Thursday, members of the Organization of Petroleum Exporting Countries along with some non-cartel members, including Russia, agreed to extend the OPEC supply cuts deal to March, 2018.

OPEC producers will continue to cut about 1.2 million barrels per day (b/d) for the next nine months and non-members will reduce their production by a total of 600,000 b/d.

The move is an effort by pact participants to reduce the global oversupply of crude that dragged down oil prices to below $28/barrel in February, 2016.

Oil’s price decline forced Russia and Saudi Arabia to tighten their belts and resulted in unrest in some producing countries, including Venezuela and Nigeria.

Beginning in January, the output reduction pact began and recovering oil prices rose to over $50/barrel.

Thursday’s move extending the two per cent cut in global production into the first quarter of 2018 was widely anticipated by the market, but many were looking for OPEC cuts to be deeper.

Brent crude oil fell $2.07 to $51.89 a barrel by 1:02 p.m. EDT and US WTI crude futures traded down $2.05 at $49.31.  During the session, WTI fell as much as 5 per cent to a low of $48.75.

While the recent rise in prices helped a number of OPEC nations which have had to use foreign-currency reserves to meet their budgets, the price boost also spurred US shale producers, who are not participating in the agreement.

The increase in US oil output has slowed the rebalancing of the market as global crude stocks remain at near record highs. As well, despite the OPEC supply cuts, OPEC managed to maintain their exports at existing levels as members sold oil from stocks, according to Reuters.

During negotiations, Russia suggested extending the duration of the cuts to an additional 12 months, however, Saudi Energy Minister Khalid al-Falih disagreed.

“There have been suggestions (of deeper cuts), many member countries have indicated flexibility but … that won’t be necessary,” said Falih.

As well, Falih says Saudi oil exports are set to decline significantly in June as the desert nation will use its resources to power electrical utilities in an effort to stay cool during the coming summer months.

The agreement still sees Nigeria and Libya excluded from the cuts as their output has been impacted by dissent.

OPEC sources told Reuters the Thursday meeting highlights a need for long-term cooperation with non-OPEC producers as political and economic issues affected by oil prices come to the forefront.

“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,” Gary Ross, head of global oil at PIRA Energy, a unit of S&P Global Platts told Reuters.

Overall, OPEC is hoping to bring down global crude stockpiles from 3 billion barrels to the five-year average of 2.7 billion barrels.

“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.”

OPEC is faced with the possibility of pushing oil prices too high which would result in a further increase in activity in the US shale industry.  The United States is the world’s top oil consumer and now rivals Saudi Arabia and Russia as the world’s biggest producer.

And American producers are ready to pounce should oil prices rise.

“Less OPEC oil on the market enhances the opportunity for American energy to fill needs around the world, and will help us achieve energy dominance,” Ryan Sitton, Texas Railroad Commissioner told Reuters.  The Texas Railroad Commission regulates the state’s oil industry.

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