OPEC’s agreement to cut production in order to boost the global oil market seems to be working, but new reports indicate the organization could extend the cuts. The group is likely to determine whether or not to continue with the cuts at its bi-annual meeting, scheduled for May 25. Seeking Alpha explains three reasons why this could happen:
- The “hangover” from overproduction in November and December was felt in January and February, so the positive effects from the cuts are just beginning to show. The six-month production cut now looks more like a four-month cut.
- Analysis of data from the cuts will take a while, and the short time until the May meeting may not be enough time to figure out whether or not the cuts did any good.
- Reports from Saudi Arabia show that the Saudi Aramco IPO will be delayed until 2018. This means that Saudi Arabia will have to support higher oil prices longer, since there’s not enough time to “fundamentally shift oil tactics” before the IPO, so staying on course is better for keeping oil prices higher.
Analysts around the world have speculated about compliance by OPEC since the agreement to cut production was signed. So far, reports show about a 90 percent compliance rate for OPEC and 40 percent for non-OPEC producers, according to Seeking Alpha.
Even if some countries OPEC countries cheat, and compliance is not total, production cuts in any form are better than ending the agreement. Plus, the International Energy Agency (IEA) has said this is one of the “deepest cuts on record.” So despite some the fact the United Arab Emirates (UAE) has delivered smaller portions of their pledged reductions, Reuters reports that However, oilfield maintenance could help push the country’s compliance higher. The UAE’s OPEC governor, Ahmed Al Kaabi, told Reuters it is committed to OPEC cuts and is taking necessary measure to ensure it is fully compliant.
Stockpiles and shale production
Oil inventories are still high, and a glut still exists. Reuters reporters Catherine Ngai and Liz Hampton note that traders are reducing U.S. crude stockpiles, since it is unprofitable to store for future sales. This “could signal the beginning of the end for a two-year trade play that came about during an international price war and global oil glut.”
In the last week, U.S. crude exports have hit a record high, and producers and traders have shipped 1.21 million barrels of crude a day. According to the most recent export report from the Energy Information Administration, this is the highest number since 1993. Record stockpiles from the last days of “all-out production by OPEC” arrived this month, but since the price for WTI is less than Brent, demand for WTI from refineries is attractive, resulting in record exports for U.S. crude. This means that U.S. shale production might not affect the OPEC production as much as some might think.
Oilprice.com reported OPEC Secretary-General Mohammed Barkindo dismissed speculation that the United States’ increase in shale oil production was counteracting the effects of the bloc’s less-than-two-month-old output reduction strategy. Barkindo said last week in London:
We are not looking at the U.S. as a risk, we are looking at the U.S. as a partner — a strategic partner in the rebalancing process.
Gary Morgan, director for the Houston analysts group Clarksons Platou Shipping Services USA LLC, said that most of the increasing shale production will be for exports, reports Bloomberg.
As output moves from 9 million barrels a day to 9.3 million or 9.4 million, three-quarters of that increased output will be for export.