OPEC isn’t doing its job. Or at least, it’s going about its job in a radically different way from what we’ve come to expect. The petrostate cartel has in the past tightly controlled production to keep oil prices where they’d like them to be: high. When the market dipped, OPEC duly cut production, sending prices right back up.
But as the price of oil has roughly halved over the last ten months, OPEC has pursued a different strategy, choosing to forgo production cuts and endure the bearish market in a bid to compete with new suppliers (like the upstart American shale producers) for market share. Now, as Reuters reports, OPEC’s collective output is as high as its been since 2012, even as the price of crude pinches its members’ budgets:
OPEC oil supply in April has jumped to its highest in more than two years, boosted by record or near-record supplies from Iraq and Saudi Arabia, a Reuters survey showed, as key members stand firm in their focus on market share. […]
Besides Iraq, the main reasons for the rise are higher Nigerian exports and a further small gain in Libyan production despite the unrest there. Top exporter Saudi Arabia has kept output near a record high in April, sources in the survey said.
As the cartel’s biggest producing member, Saudi Arabia is the likeliest target to reduce output and thus reduce the global oversupply. However, it has been the Saudis who have led the push to compete for market share, and even though members like Nigeria and Iran have voiced complaints about OPEC inaction, they too have been pushing to boost production and eke out some space in today’s crowded oil market.
OPEC is betting that low oil prices will squeeze out American shale, which is relatively expensive to extract. To some extent that’s working, as output growth here is slowing, but many U.S. producers are putting crude in storage or choosing to drill but not yet frack wells, contributing to a so-called “fracklog” of crude that will flood the market if and when oil prices tick back upwards.
Take this together with OPEC’s apparent intent to drill, baby, drill, and it’s hard to see prices spiking again anytime soon.