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Crude Economics
Why OPEC Hasn’t Cut Production

Speaking at a conference in Houston this week, Saudi oil minister Ali Al-Naimi said of the recent proposed petrostrate production freeze that “The freeze I’m sure will give people in the market some hope, that something will happen and it will happen – but we are not banking on cuts because there is less trust.” Meanwhile, OPEC’s secretary-general on Monday had this to say about American shale, via Bloomberg:

“Shale oil in the United States, I don’t know how we are going to live together,” Abdalla Salem El-Badri, OPEC secretary-general, told a packed room of industry executives from Texas and North Dakota at the annual IHS CERAWeek meeting in Houston.

The Organization of Petroleum Exporting Countries, which controls about 40 percent of global oil production, has never had to deal with an oil supply source that can respond as rapidly to price changes as U.S. shale, El-Badri said. That complicates the cartel’s ability to prop up prices by reducing output.

“Any increase in price, shale will come immediately and cover any reduction,” he said.

El-Badri’s comments relate to the reality that it doesn’t take much time to restart shale operations, which means U.S. producers can quickly respond to any significant price rebound by increasing production. Couple that with situation that these shale firms are finding ways to turn a profit at lower and lower price levels, and it’s not hard to understand why OPEC has been so hesitant to cede any market share by restricting its supply.

However, merely freezing production won’t do much to eat away at the global glut. As one energy analyst told Reuters, “[i]f they freeze production at January levels when you’re already over supplied by around a million barrels per day it just prolongs that situation of oversupply.” And Naimi’s explicit rejection of production cuts has already all but erased the gains made in the oil market yesterday on the news that the IEA expects U.S. output to dip over the next two years. WTI is down 4.46 percent on the day, with Brent crude falling nearly 4 percent itself.

The world’s petrostates are feeling the pinch, but due in large part to U.S. frackers, they find their hands tied this time around. A production freeze seems the most they’ll be able to manage for now, but that won’t be enough to kick off a real price recovery—and even if it did, American shale output would be there to blunt the rebound.

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