decision by oil producers was adopted at a time the market is faced with supply
glut. Due to the oversupplied market, oil prices have been halved in recent
years, damaging revenue of oil producers.
addition to the 14-member Organization of the Petroleum Exporting Countries, 11
non-OPEC oil producers including Russia have cut their production since
January. This production cut drove oil prices back to above $50 and oil
producers once again saw economic improvement. Many of these countries like
Saudi Arabia and Venezuela were heavily dependent on black gold sales.
downward trend in oil prices started in 2014, forcing Saudi Arabia and Russia
to streamline their public budget. That also triggered unrest in Venezuela and
Nigeria. But this year oil prices have pushed US shale oil industry to become
more active. The US has not joined the OPEC-NOPEC oil cuts deal and that would
slow down the trend of market balance.
December, OPEC made a historic decision after years of disagreement to reduce
their production level. It was the first deal reached between OPEC and non-OPEC
producers led by Russia in 15 years.
parties to the agreement agreed on reducing their output by 1.8 mb/d (2% of
world total production) in the first half of 2017.
of these countries chose the level of production mentioned in the October 2016
deal as the starting point. Official figures show that in April ten countries
fulfilled their obligations. Nine other countries reached their objectives in
March. Large producers are more influential in the exercise of this deal. Saudi
Arabia, the largest producer of OPEC, has been in full compliance with the OPEC
deal since its implementation in January. Libya and Nigeria were exempted from
production cut, while Iran was allowed to raise its output.
non-OPEC producers were facing challenges. Russia, which accounts for half of
non-OPEC cut, said it would go ahead with the agreed cut gradually. Non-OPEC
states were 69% compliant with the deal in April. However, the International
Energy Agency (IEA) put this figure at 66%.
Despite the output
cut, OPEC kept exports fairly stable in the first half of 2017 as its members
sold oil from stocks.
The move kept
global oil stockpiles near record highs, forcing OPEC first to suggest
extending cuts by six months, but later proposing to prolong them by nine
months and Russia offering an unusually long duration of 12 months.
“There have been
suggestions (of deeper cuts), many member countries have indicated flexibility
but … that won’t be necessary,” Saudi Energy Minister Khalid al-Falih said
before the meeting.
He added that OPEC
members: Nigeria and Libya would still be excluded from cuts as their output
remained curbed by unrest.
also said Saudi oil exports were set to decline steeply from June, thus helping
to speed up market rebalancing.
“Russia has an
upcoming election and Saudis have the Aramco share listing next year so they
will indeed do whatever it takes to support oil prices,” said Gary Ross, head
of global oil at PIRA Energy, a unit of S&P Global Platts.
OPEC has a
self-imposed goal of bringing stocks down from a record high of 3 billion
barrels to their five-year average of 2.7 billion.
have seen a substantial drawdown in inventories that will be accelerated,”
Falih said. “Then, the fourth quarter will get us to where we want.”
Saudi energy minister separately told executives in Houston that its
participation in an international agreement to cut crude output was reinvigorating
rivals in the US shale patch.
that Saudi Arabia had a hand in “watering of the green shoots”, and welcomed
the return of investment in US shale.
added: “I am optimistic about the global market outlook in the weeks and months
ahead, though I caution that my optimism should not tip investors into
irrational exuberance or wishful thinking that OPEC or the kingdom will
underwrite the investments of others at our own expense.”
US, which is the largest producer of oil, is locked in rivalry with Saudi
Arabia and Russia. Shale oil has seen significant growth in recent years and it
needs to arrange its condition in coming years.
OPEC, non-OPEC deal to cut production will help rebalance the market, but it
will not significantly improve prices.
Courtesy of Iran Petroleum