OPEC production cuts are here to stay, while America pumps harder

News broke this week that the Organization of Petroleum Exporting Countries (OPEC) and other oil producers have agreed to extend their cuts to oil production by another six months until the end of the year. 

OPEC and certain non-member countries like Russia signed an accord in September 2016, in which they agreed to cut their collective crude production by about 1.8m bpd during the first half of 2017. OPEC hopes that production limits will reduce the world’s massive crude stockpiles and re-balance oil markets.

OPEC will decide formally whether to extend the cuts when its ministers meet in Vienna on May 25th. The decision must be unanimous in order to be effected. Saudi Arabia and Russia have already indicated they are in favour of an extension. Non-OPEC member Turkmenistan may join the accord too.

However, there have already been hints that the production limits will remain in effect into 2018.

Saudi Arabia’s energy minister Khalid Al-Falih recently told a conference in Kuala Lumpur he was “confident the agreement will be extended into the second half of the year and possibly beyond,” according to Bloomberg reports.

OPEC has lifted its 2017 estimate for oil supply growth from non-OPEC members from 600,000 bpd to nearly 950,000 bpd. Most of this will come from the US, where supply will grow by an estimated 820,000 bpd during 2017, according to OPEC. Shale producers in the country have continued to ramp up drilling and have doubled their rig counts in the past year, which has helped drive down crude prices to under $50/bbl again.

OPEC used its monthly report to make a diplomatically worded plea, likely aimed at America. “Continued rebalancing in the oil market by year-end will require the collective efforts of all oil producers to increase market stability, not only for the benefit of the individual countries, but also for the general prosperity of the world economy,” OPEC’s monthly report for May stated.

It looks unlikely that the US will pay any heed. Analysts at UBS have estimated that US crude producers can make a profit as long as oil prices remain above $40/bbl. In early 2014, the breakeven level was $65/bbl.

The OPEC production cuts will not, however, interfere with Iraq’s plan to increase its production capacity to 5m bpd by the end of the year. It pumped 4.4m bpd in April, according Bloomberg data, and is OPEC’s ninth largest producer by volume.

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