Wed | Aug 23, 2017

OPEC and other nations set to extend oil output cuts

Published:Friday | May 26, 2017 | 5:00 AM
Russian Minister of Energy Alexander Novak, Khalid Al-Falih Minister of Energy, Industry and Mineral Resources of Saudi Arabia and Mohammad Sanusi Barkindo, from left, OPEC Secretary General of Nigeria wait for the start of a meeting of the Organization of the Petroleum Exporting Countries, OPEC, at their headquarters in Vienna, Austria, Thursday, May 25, 2017. (AP Photo/Ronald Zak)

OPEC and other oil nations meeting Thursday were set to extend their production cuts in an effort to shore up prices. But the intended impact could be short-lived.

That's due to United States shale producers. With crude prices above US$50 a barrel from lows of last year, they are increasingly moving back into the market. Their output already is partially offsetting the cuts, and even more US companies are poised to return if prices rise further.

The upshot is that the price of oil - and derived products like fuel - is unlikely to increase much in coming months, analysts say. That will be welcome news to consumers and energy-hungry businesses worldwide, but could continue to strain the budgets of some of the more economically troubled oil-producing nations, like Venezuela and Brazil.

The latest reductions have been in effect since November, when the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut production by 1.2 million barrels a day. Non-OPEC countries, led by Russia, chipped in with a further 600,000-barrel reduction.

With the deal due to expire at the end of June, one participant said the group had opted for a nine-month extension. He spoke only on condition of anonymity because he was not authorised to divulge the information prematurely.

Earlier, Saudi Oil Minister Khalid A. Al-Falih spoke of a "nine-month straight" extension going into the meeting. Iran's Bijan Namdar Zanganeh floated possible extensions of three months, six months or even a year, and said his country had "no difficulty" with any of the options, while Jabbar Ali Hussein Al-Luiebi, his Iraqi counterpart, mentioned "the scenario of a nine-month freeze".

Al-Falih said that the cuts had managed to draw down inventories. At the same time, he said "more time is needed" to reduce oversupply.

The price of oil slumped US$1.03 a barrel to US$50.33 in New York trading Thursday, seemingly on the realisation among investors that the extension is unlikely to substantially boost prices in the longer term.

Oil prices have risen less than OPEC hoped for from last year's levels. Crude sits substantially below the highs above US$100 a barrel reached in 2014, but is priced high enough to bring back into the market US producers who eased back as prices tumbled last year. US shale production requires a higher price to be profitable.

US output since last year has increased by nearly a million barrels a day to a daily nine million barrels. That already puts American producers in the league with oil giants Saudi Arabia and Russia and cuts further into OPEC's past ability to play a role in setting prices and supplies

More than 400 oil rigs are now working US shale fields - an increase of more than 120 per cent compared with a year ago. And US producers are poised to expand more, even if prices tick upward only moderately as a result of an oil-cut extension by OPEC and its partners.

Commerzbank cited data from the US Department of Energy saying US production was roughly 540,000 barrels per day higher in mid-May than at the start of the year.

"This offsets nearly half of OPEC's production cuts," it noted.

Even a decision to maintain oil cuts thus is likely to only kick the can down the road from Thursday's meeting until OPEC ministers convene again late this year. Crude prices are unlikely to rise substantially - and that means the era of windfall profits appears to be over for member nations, at least for now.

While analysts at research firm IHS Markit expect OPEC revenues to rise modestly this year after dropping from their peak of US$1.2 trillion in 2012, "the total will be less than half the level of 2012, when prices were more than double current levels".

Ahead of the meeting, the organisation announced that Equatorial Guinea had joined, expanding OPEC membership to 14.

- AP