The world’s petrostates hoped 2017 would be a better year for them. Thus far, things haven’t exactly gone according to plan.
OPEC and a group of 11 other oil producing countries agreed late last year to cut their collective production by 1.2 million barrels per day through the first six months of this year, hoping that their market intervention might eat away at the global glut of crude and push prices upwards. Since that announcement, prices crept up roughly $10 per barrel to $55, but this week have fallen again on concerns of oversupply, and comments from the Saudi energy minister that “it is premature to talk about extending the cut.” The WSJ has more:
A surge in U.S. production is a major threat to OPEC’s effort to reset the still-oversupplied global oil market. The U.S. oil-rig count has been on the rise 13 weeks and now stands at its highest level in two years, according to oil-field services firm Baker Hughes Inc. The number of active drilling rigs in the U.S. rose again last week—by 11 to 683. […]
U.S. drilling is now set to increase by 123,000 barrels a day in May, according to the U.S. Energy Information Administration, the steepest monthly rise since February 2015.
The petrostates behind this cut are stuck between a rock and a hard place—the hard place being the fiscal squeeze bargain oil is placing on their governments, and the rock being U.S. shale production. As OPEC & co. cut, they cede market share to their American rivals, and as oil prices rise, those U.S. shale producers are predictably taking advantage and upping their own output.
This is the quandary for these petrostates: cut too much and they’ll be handing the market on a silver platter to upstart frackers, but cut too little and cheap crude will bleed their oil-soaked coffers dry. They’ll want to strike a balance between those two extremes, and according to the WSJ, OPEC officials believe that balance lies somewhere near $60 per barrel:
Saudi Arabia, Iraq and Kuwait believe $60 a barrel will lift their economies and allow for more energy-industry investment, the officials said, without jumpstarting too much American shale output, which can be ramped up and down with prices more easily than most oil production.
Of course, to reach those levels, the production cuts will need to be extended past June. That will be discussed in Vienna next month, and until then we can expect oil prices to continue to jump and fall on the cryptic words of oil and energy ministers alike. Whatever the outcome, it won’t be favorable to these petrostates, for whom $100+ per barrel now feels like a long-lost memory.