Saudi to cut oil production

Saudi to cut oil production
In a bid to address flagging oil prices, Saudi Arabia, has pledged to limit its oil exports to 6.6 million bpd (barrels per day). This is a million bpd lesser than the previous year. The announcement was made in Russia during a meeting between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers..

In a bid to address flagging oil prices, Saudi Arabia, has pledged to limit its oil exports to 6.6 million bpd (barrels per day). This is a million bpd lesser than the previous year.

The announcement was made in Russia during a meeting between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers.

Background

From 2010 until mid-2014, world oil prices were around $110 a barrel. The price of oil has fallen significantly in the recent times. It is now well below $50. To address the sluggish prices, OPEC nations came to an agreement in November 2016 to cap their output until the oil glut was reduced.  In May 2017, they agreed to extend that deal by nine months.

This isn’t the first time oil prices have been severely hit due to a glut. Prices of oil fell in the 80s due to falling demand. It resulted in a six-year decline in the price of oil.

Analysis

At the recent meeting, all parties present discussed whether they should extend their deal of cutting output by 1.8 million bpd beyond March 2018. The group has been struggling to raise the prices of crude oil.

Saudi Arabia, the world’s largest oil producer’s move to cut its output, was welcomed by OPEC nations.

One of the reasons the cuts by OPEC nations has had minimal effect on the prices is in part due to US. The latter has increased production and OPEC nations like Nigeria and Libya are exempt from this deal. Riyadh has decided to cut its exports to the US as the American inventories are bloated. The US has started importing more from Iraqi due to the Saudi cuts. US is not governed by the deal struck by OPEC and non-OPEC nations.

As a result of Saudi’s announcement, the market saw a minor increase in the oil price to $48.50 per barrel. Erik Norland, an economist told the Telegraph, “The market’s muted reaction stems from the fact that today’s developments leave the existing agreement little changed with production still rising in OPEC members Libya and Nigeria, as well as in non-OPEC nations such as Canada and the United States.”

Assessment

Our assessment is that OPEC will not be able to sustain their economies in the medium term by cutting oil production. A second challenge will be the price at which US and North American manufacturers can re-start the production of Shale oil. It is estimated at $60, it will be profitable for US manufacturers to pump out Shale oil.

Unless Saudi Arabia along with OPEC can convince United States to cooperate, the glut will not be solved and the prices will continue to drop. However, with US production being its highest in 30 years, this is a highly unlikely scenario.

 

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