BLOG: Decisions, Decisions - Will OPEC/NOPEC Extend Oil Cuts?
Despite some frustration that U.S. shale producers continue adding drilling away, OPEC and non-OPEC nations will probably concede they need to continue their own production cuts for another six months.
The agreement last fall gave an immediate bounce to oil prices, and buoyed by the increase – as well as faster turnaround time in shale drilling – U.S. producer exuberance turned on the shale tap. Crude inventories in the United States soared by almost 5 million barrels, reaching more than 533 barrels last week, according to the U.S. Energy Information Administration (EIA). That’s a stretch beyond the forecasted increase of 2.8 million barrels.
But a key element in the supply-demand equation is pulling back. Oil prices this month have dropped close to their November lows. For several days now, WTI has traded below $50 per barrel, closing out March 22 at $48.04 per barrel. OPEC’s basket crude price is dropping, too. On Wednesday, the price of 13 included crudes stood at $48.28 per barrel, down 2 percent from the prior day’s $49.23 per barrel.
Still, the commodity is returning to fundamental balance after more than two years of asymmetry. Analysts at Jefferies say robust demand growth of 1.4 percent this year and some compliance among non-OPEC (NOPEC) nations could be sufficient to bring the market into balance during the second half of this year.
But, wary of price declines, OPEC nations recognize they’ve got more at stake than a fickle market and jittery investors.
“Another price plunge would imperil some key policy priorities of OPEC leaders and risk inciting public anger,” said analysts at RBC Capital Markets in a report this week.
While no producer is flush with cash in the current price environment, it has permitted the better-off countries to dial back unpopular austerity measures and increase social spending, RBC said.
“The more fragile ones in turn have been able to continue treading water and have staved off complete implosion – a real risk for [Iraq, Venezuela, Nigeria, Algeria and Libya] when oil was in the twenties,” they noted.
Given the resurgence of U.S. shale production, some participants have “questioned the wisdom of the output cut,” but RBC notes that as the market has neared rebalance, OPEC leaders who feared losing power now have more job security.
The OPEC/NOPEC monitoring committee – composed of Kuwait, Algeria, Venezuela, Russia and Oman – is scheduled to gather this weekend in Kuwait for a chat about the deal’s progress. On May 25, leaders are scheduled to make a final decision on output quotas for the rest of the year.
Compliance – a chief concern throughout the cut period – has largely exceeded expectations. In January, compliance reached 94 percent and grew to 111 percent in February – based largely on Saudi Arabia’s cut of another 300,000 barrels per day above the agreed level, analysts at Jefferies noted this week. While the agreement has yet to result in a visible drawdown on supply, Jefferies said the effects and nearing an end and OECD (Organization for Economic Cooperation and Development) nation inventories will begin to decrease.
Still, some anxiety emerged earlier this month over whether Saudi Arabia wanted to sign on for another six months. But that anxiety, too, is amorphous. More recently, the oil minister has reaffirmed that Saudi will do what it takes to ensure the plan’s success, RBC analysts noted.
“In the end, we believe that the producer cartel will extend the production cut when they do meet on May 25,” the analysts said. “While elevated inventories likely will be the official reason for the roll over – certainly taking center stage among the technocrats in the oil ministries – we contend that domestic economic considerations will also be decisive factors at play for the leaders of these petro-states.”
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