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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