OPEC succeeded in getting its member nations and some other non-OPEC producers to agree to a deal to cut their oil output last year. The output cuts were necessary in order to halt the supply glut that has depressed oil prices for much of the last three years. The supply of crude oil has outpaced the demand due to the return of producers such as Iran and Libya as well as an increase in U.S. shale oil production. However, it seems that the deal might be unraveling at the seams because some countries are not committed to holding their ends of the deal.
U.S. Shale oil cast dark shadows on the prospects of oil
Crude oil has managed to find support around $55 per barrel up from its $30 lows at the beginning of 2016. However, one would have expected OPEC’s deal to cut oil production to propel oil prices faster and higher towards the 2014 $100 per barrel price. The main reason oil prices haven’t spiked in tandem with OPEC’s move to reduce output is that the supply glut in oil is still persistent.
Interestingly, the supply glut situation has remained unchanged because U.S. Shale oil operators are now increasing their output from shale basins because of the uptrend in oil prices. Alex Poldoski an analyst at Saxon Trade observes that “the weak $30 price of oil made oil production unprofitable for shale oil drillers but the recent uptrend is encouraging shale operators to return to the markets.”
The U.S. Energy Information Administration said U.S. oil output increased by 1.7 million barrels in the week ended March 3. Interestingly, OPEC’s secretary-general Mohammad Barkindo acknowledges the influence of shale oil produces when he said “we did confess that we do not have sufficient understanding of how they operate and their impact on us.”
Saudi Arabia wants other countries to pick up the slack
Saudi Arabia oil minister Khalid Al-Falih expressed cautious optimism about the OPEC deal during his remarks at the CERAWeek that held earlier this month in Houston. Al-Falih started by noting that the compliance level in deal to reduce output has outpaced the low expectations on OPEC’s ability to pull off the deal. In his words, “the market had low expectations, which we have exceeded by a large degree… We are definitely on the right track and are picking up speed in terms of delivery.”
However, the deal to cut production hasn’t done much to end the supply glut in oil; in fact, one can argue that OPEC’s supply cut is providing U.S. shale oil producers to increase their output. There are indications that OPEC might need to extend the deal to cut output beyond the first six months of this year if it really wants to end the supply glut in oil.
However, Al-Falih says there’s no point discussing the possibility of extending the deal beyond the first six months of the year if the other participants in the deal are not ready to uphold their ends of the bargain. Last month, OPEC reported about 85% compliance in the deal to but the high compliance level was recorded because Saudi Arabia went out of its way to cut its output beyond its initial promise.
In Al-Falih’s words, “it is not going to be fair or acceptable that some countries will carry the burden for all… We’ve been willing to do it for the front end but we expect our friends and partners to pick up the slack as we move forward.” Al-Falih’s also noted that Saudi Arabia “will not bear the burden of free riders… Saudi Arabia will not allow itself to be used by others. My colleagues have heard that privately, and now I’m saying it publicly.”If you liked this post, you can consider subscribing to our free newsletters here