In Vienna on May 25, members of the Organization of the Petroleum Exporting Countries (OPEC) and its allies — including Russia — agreed to extend their cutbacks in oil production in hopes of addressing the glut of oil that’s been keeping down the price-per-barrel.
It’s not a new tactic. In November of last year, the group agreed on a six-month production cut of 1.8 million barrels per day (bpd) with the same hoped-for outcome. The extension this May keeps the cuts in place for another nine months — through spring of 2018. The accord represents a continued collaboration among countries that pump nearly 60 percent of the world’s oil.
After the extension was announced, Khalid Al-Falih, Saudi Arabia’s energy and industry oil minister, told reporters, “We considered various scenarios, from six (months) to nine to 12 and we even considered options for a higher cut. . . All indications are solid that a nine-month extension is optimum and should bring us within the five-year average by the end of the year.”
He went on to say, "The market is now well on its way toward rebalancing."
Will the extended cuts do the trick?
Not everyone agrees with Al-Falih’s assessment of the effectiveness of OPEC’s strategy. Johannes Benigni, chairman of the JBC Energy Group, has gone on record saying he believes that the nine-month extension won’t be long enough: “You will see they have to roll on with their cuts. They will have to go to the next year and beyond.”
Hamza Khan of ING was even harsher in his view of the deal, calling it “half-baked” and accusing OPEC of relying on the hope that “nine more months will achieve what the prior six months couldn’t.”
These experts are skeptical that what has worked for OPEC in the past, in terms of propping up prices, will work in the future. And some of the reasons can be found in the changing supply-and-demand landscape of today’s oil industry.
The role of shale and other factors in the energy marketplace
If, as OPEC hopes, these cutbacks go on to produce higher oil prices, it’s very likely that shale production in the U.S. will also increase, blunting the impact of those cutbacks. According to the New York Times, “Shale and other sources are likely to fill in whatever gaps OPEC production cuts created in the market. And OPEC may be making things easier for shale producers by agreeing to rein in output for such a long period.”
Another factor affecting oil prices is the world’s demand for oil. OPEC is counting on demand continuing, if not increasing. But that, too, is an open question. The growing popularity of electric cars and hybrids, coupled with gains in fuel efficiency and the movement toward renewables make that assumption something less than a foregone conclusion.
Used to be that OPEC was in the driver’s seat when it came to controlling oil prices. But with other factors now in play and beyond its control, the effectiveness for OPEC of this recent nine-month extension of production cutbacks remains to be seen.
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