So what will they do?
For the whole of last year, OPEC had been supporting prices on speculation of an impending production cut. In January of this year, the production cuts became a reality, and the oil cartel achieved an exemplary compliance rate of above 90 percent for both January and February on its agreed plan.
But prices have not reacted the way many had hoped. After breaking out of the long-term resistance of $52 per barrel, oil was unable to rally above $55 per barrel on a sustained basis. Oil traded in a narrow range for more than two months before breaking down below $50 per barrel on March 09, and is now headed lower.
OPEC's bête noire, the U.S. shale oil drillers, have used higher prices to add new rigs for the past eight weeks in a row. In the week to March 10, the total rig count increased to 617, compared to 386 a year ago, according to energy services firm Baker Hughes Inc.
Though the rig count is still way below the peak of 1,609 reached in October 2014, the recovery from the six-year lows of 316 rigs in May 2016, has been outstanding. The drillers have added rigs for 37 of the past 41 weeks, bringing 301 rigs online in total, notes Reuters.
As a result, U.S. crude oil production, which had dropped from the highs of 9,600,000 bpd in June 2015, to a low of 8,428,000 bpd in July, 2016 is on the rise once again. In the week ending March 3, 2017, U.S. crude oil production had risen to 9,088,000 bpd. The worrying part for OPEC is that the EIA estimates that U.S. oil production will average 9,210,000 bpd this year, though many experts believe that the number is likely to be revised higher if oil prices remain north of $50 per barrel.
We had a veiled warning in this regard from the Saudi oil minister Khalid Al-Falih recently when he said : "We've been willing to do it [shoulder a disproportionate share of the production cut] for the front end but we expect our friends and partners to pick up the slack as we move forward," reports Bloomberg.
For the U.S. shale oil producers and others wanting to make use of the current higher oil prices to increase production, the minister said: "My optimism should not tip investors into what I would call irrational exuberance or wishful thinking that OPEC or the Kingdom will underwrite the investments of others at our own expense and long-term interests ..." A temporary glut is one thing, "intervention in response to structural shifts is largely ineffective," reports the Weekly Standard.
These warnings show Saudi Arabia's growing frustration. After having cut more than its quota, it is just not getting the support it needs from the production cut members. If the situation doesn't improve in the next few weeks, it is unlikely that Saudi Arabia will continue to shoulder the responsibility alone.
So, will Saudi Arabia ditch the idea of an extension of production cuts into the second half of the year?
The most likely possibility is that they will not give any clear indication on the extension, until the meeting on May 25, 2017. They will keep all options open.
If oil quickly recovers and sustains above $50 per barrel, the possibility of the cuts getting extended for another six months increase. On the other hand, if oil prices remain below $50 per barrel, even after achieving the targeted cuts, chances are that Saudi Arabia will not opt for an extension.
Meanwhile, OPEC is likely to engage the U.S. shale oil producers in some kind of a discussion in hopes of coming to some understanding, wherein U.S. shale doesn't increase production at breakneck speeds, allowing prices to remain above $50 a barrel. However, this is easier said than done.
So, for now, there is no clarity on the extension of the deal. OPEC will remain in a wait and watch mode, with oil's performance between now and May being the key factor.
Rosneft weighs in
Russia's oil giant Rosneft sees a lack of will among the main signatories to the OPEC/non-OPEC deal and U.S. shale production as the main risks to a possible extension of the global supply cut deal, a Rosneft spokesman told Reuters on Monday.
"We think that in the long term global oil demand dynamics and reduced investment during the period of ultra low prices will balance the market, but that the risk of a price war resuming remains," the spokesman said.
Although OPEC is scheduled to decide on a possible extension in May, estimates and guesses are many, and now Rosneft has expressed its view via emailed answers to questions by Reuters.
While Rosneft described the agreement as viable, it believes that the long-term stabilization of prices should involve not only producers, but also key consumers and regulators, which is highly unlikely given the current global political and economic turbulence.
Therefore, there is a risk that the deal will not be extended, due to both the positions of the main participants as well as U.S. shale, which is unlikely to have a great desire to join any production cut agreement in the foreseeable future, Rosneft told Reuters.
Saudi Arabia's price war failed to result in dramatically boosting its market share because of the efficiency and resilience of the Russian oil industry, the Russian oil giant reckons.
The Saudis will continue to be interested in controlling the price of oil by trying to strike a balanced price that would allow them to increase oil revenues on the one hand, and curtail a significant rise in U.S. shale output on the other hand, Rosneft told Reuters.
Reader Comments
to our Newsletter