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Crude Economics
Petrostates Seen as Likely to Extend Cuts

In an attempt to push oil prices up, OPEC and a collection of eleven other oil producing nations agreed last November to cut their collective production by 1.2 million barrels per day (bpd) during the first six months of 2017. That’s been somewhat successful, though certainly not as effective of a lever the group hoped it would be—oil prices jumped $10 per barrel after the announcement, but have since creeped down to levels just $5 above where they were before the cuts. But June is right around the corner, which means it’s time for this rag-tag bunch to decide whether or not they’re going to continue to constrain their output once this first cut ends. As Bloomberg reports, most analysts believe they have no choice in the matter:

With U.S. crude stockpiles swelling to record levels and prices sinking below $50 a barrel, OPEC and its partners have little choice but to keep going, according to all 13 analysts surveyed by Bloomberg.

“They’ll probably think they need to grin and bear it longer,” said Ed Morse, head of commodities research at Citigroup Inc. in New York. “The glue that bound them together to begin with, which was higher prices, is the glue that will continue to bind them together.” […]

“The cost of a change of course for producers is simply too high,” said Bill Farren-Price, chief executive officer of consultants Petroleum Policy Intelligence. “They are committed to this course for now, and they will look for stocks to draw in the second half.”

The purpose of these cuts was to eat away at a global glut that brought prices crashing down from more than $110 per barrel to less than half of that today. But this petrostate plan had a fatal flaw: rising prices were also a benefit to U.S. shale producers, who have taken advantage of this small but significant bump to increase their own output. American production is up more than 500,000 bpd since October, and much of that has been made possible by this petrostate cut.

OPEC and co. are meeting in Vienna at the end of May to look at the possibility of continuing cuts through the end of the year, but the delegates and oil ministers there assembled are likely to find themselves with precious few options. Meanwhile, American suppliers are continuing to innovate their way to profitability even at bargain oil prices, just as they’re pouncing on the opportunities petrostates are affording them.

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  • Kevin

    In the aggregate they would be better off maintaining, or expaninding on, the cuts, but it really comes down to whether the Saudis are willing to and what concessions they would want for that… are they willing to continue the cuts while Iran (and Iraq) maintain or increase their output which is financing Iran’s adventures in Syria, etc.

    • Andrew Allison

      Short answer to your question: Hell No! The Saudis have been announcing loudly and clearly that they intend to maintain OPEC market share. The recent talk about increasing production was, I think, a warning to the other producers.

  • ljgude

    It might not be considered fair trading but a $20 a barrel bonus paid to US producers might be cheaper than rendering petrostate jihadis harmless. Just kidding, but still…..

  • Josephbleau

    Oil drops, Venezuela creates market economy. Oil drops, Saudi Kingdom creates bicameral legislature. Oil drops, Germany reduces exports in favor of Italy Greece and France. Oil drops, Russia focuses on feeding its people. …Nahh. Steve Martin the Oil Minister.

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