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Oil Production Cuts by OPEC Proceed as Planned

OPEC and Russia officials reported that they are satisfied with the rate of oil production cuts. Currently, the production is cut by 1.5 million bpd, and it is supposed to be reduced by the total of 1.7 million bpd by the end of next month. WSJ reports:

Saudi energy minister Khalid al-Falih said OPEC’s 13 nations and 11 producers outside the cartel had made collective cuts totaling 1.5 million barrels a day since agreements were struck in late November and early December. Oil prices have risen nearly about 20% since those deals were made, despite widespread skepticism over whether OPEC and other producers would follow through.

Mr. Falih also brushed off a new energy policy statement from the Trump administration, which said the U.S. would seek independence from OPEC but maintain close relationships with its Persian Gulf allies to fight terrorism.

“We in Saudi Arabia look forward to work closely, cooperatively, constructively with the incoming Trump administration, especially in the area of energy,” the minister said. (Read full article)

The price chart for crude oil futures over the last year shows obvious upward trend, but no dramatic rally after the decision on OPEC oil production cut.

OPEC oil production cuts
Brent crude oil futures

The oil production cuts by OPEC do not influence non-OPEC producers, including Libya. It is also expected that shale oil production may kick in if oil becomes more expensive. Also drilling in Arctic National Wildlife Refuge will become feasible if oil price rises above $70. At this point any influence of US shale oil production is dismissed:

Full compliance could take global oil inventories back close to their five-year average by mid-2017, lowering oil in storage by around 300 million barrels, Falih said.

“[There are] no surprises so far in terms of demand or supply from other sources so there is no reason for us to suddenly come in January and say we need a bigger reduction or a longer period,” he said ….

Ministers were also keen to highlight that any increase in high-cost U.S. shale oil production as a result of rising oil prices would be absorbed by rising demand.

“We are not worried that production in the U.S. is increasing as prices go up because I think this will be absorbed by an increase in demand,” Al-Marzouq said.

Qatari Energy Minister Mohammed Al-Sada said with increasing demand “shale oil will all be catered for”.

Russia’s Novak also said he was not worried about higher oil output in the United States. (Read full article)

It is natural inclination to exaggerate the success of the project. Probably the OPEC officials are right in the short term. But in the long term, the influence of increased non-OPEC oil production may not be neglected. Proliferation of alternative energy sources will eventually put downward pressure on oil prices.

 

See also:

Saudis, Russians Say Oil-Output Cuts Proceeding Faster Than Planned

Ministers laud strong start to OPEC, non-OPEC oil output cuts

Oil market to balance even with increased drilling – Qatar minister