Crude Economics
How Long Does OPEC Need to Cut Production?

When OPEC’s members’ oil ministers gather in Vienna later this month, they’ll ostensibly be meeting to moot whether or not to extend production cuts through the end of the year. The better question, though—the one really worth discussing—is this: how long will it take before this market intervention is finally able to eat away at the global glut of oil that precipitated the crude price collapse?

As Bloomberg reports, some analysts believe OPEC (and the eleven other petrostates it roped into its output cut agreement last November) will need to keep production down through the end of next year:

“The probability that OPEC will agree to extend its cuts is at 100 percent,” said Fesharaki, a former adviser in the late 1970’s to the Iranian Prime Minister, [at the Middle East Petroleum and Gas Conference in Dubai]. “And the cuts will have to be extended even beyond this year, to the middle or even to the end of next year.” […]

The oil market needs more time to start using up stored inventories, which are on the verge of declining, Harold Hamm, chief executive officer of Oklahoma-based Continental Resources Inc., said at the same conference. U.S. oil output is poised to expand this year by at least 400,000 barrels a day, most of it from the Permian Basin, to a level of about 9.4 million barrels a day, he said.

In other words, the issue isn’t whether or not OPEC & co. will extend the cuts, but for how long they’ll have to. With American production surging even faster than analysts expected it might, there’s some doubt that these petrostate cuts will have been worth the effort. After all, they’ve barely managed to push prices up $5 per barrel, and the price they’ve paid to induce that rebound has been the abdication of valuable market share to—who else?—U.S. shale producers.

The more successful the Saudis and their ilk are in erasing the oversupply in the market, the more wind they’ll be blowing in the sails of these upstart American suppliers. Until that calculus changes, it’s hard to foresee a good time for these petrostates to stop these production cuts.

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