“Whatever it takes.” That was the sentiment expressed by the Saudi energy minister Khalid al-Falih this week when he, along with the Russian energy minister Alexander Novak, committed to extending production cuts through March of next year to help eat away at the global oversupply of crude. The FT reports:
It was expected that Opec and other producers such as Russia would extend the agreement, reached late last year, until the end of 2017. But the move to prolong the deal until March of next year surprised market analysts…They recommended that the next round of reductions should be on the same terms as the first deal, when producer nations agreed to cut almost 1.8m barrels a day for the first six months of 2017. […]
Opec ministers are due at the end of this month to meet in Vienna to discuss the extension of output curbs, seeking to reach agreement among all participating members inside and outside the cartel. The May 25 meeting is when a final decision will be made on the nine-month extension. The ministers from Saudi Arabia and Russia were optimistic that “a wider circle of countries” outside the current group would join in implementing the cuts.
Moscow and Riyadh were the two most important players in this collection of petrostates, so it’s not surprising to see Brent crude jump nearly $1.50 in trading today. But Russia, OPEC, and its ilk won’t be satisfied with oil continuing to trade in the $45-$55 per barrel range. Their regimes have been forced to adapt to today’s market environment, but that transition has been an exceedingly painful one, coming after years of $100+ per barrel oil.
But it isn’t clear that these cuts will be able to reduce the glut of oil that precipitated crude’s price collapse. The biggest reason for that is, of course, the United States, whose shale producers have seized on this petrostate plan as an opportunity to once again crank output back above 9 million barrels per day. Since November, when cuts were announced, American production has jumped more than 600,000 barrels per day, and it’s showing no signs of slowing down.
So while Russia and Saudi Arabia are doing all they can to induce a price rebound, they’re also handing over valuable market share to their most dynamic competitors: American frackers.