OPEC and Russia Kick Crude Oil Can Down the Road

FORBES.COM- Predictably OPEC and Russia have kicked the proverbial crude oil can down the road at their latest ministerial summit on Thursday (30 November). In case you haven’t heard, the oil cartel led by Saudi Arabia, and 10 non-OPEC oil producers led by Russia, agreed to extend their collective crude production cut of 1.8 million barrels per day (bpd) beyond March next year to December.

While initial doubts were expressed over extending the ongoing deal by the Russians, most believed the cuts would be extended. That’s because, in opting to intervene in an oversupplied market 12 months ago and taking on a linear market supply and demand dynamic, OPEC took a leap into the unknown without an exit strategy.

The U.S. shale industry was wounded by OPEC’s earlier stance of keeping the taps open back in 2014. However, the industry wasn’t fatally wounded. Yet, pushed over the edge by the so-called ‘lower for longer’ oil price climate, OPEC blinked and cut headline production anyway in 2016 and managed, at least on paper, to convince non-OPEC participants led by Russia to join in the exercise.

The stated end-goal was to rebalance global oil inventories in developed economies down to a five-year average. So how has it all panned out? Well OPEC’s own research reveals such inventories fell by 23.6 million barrels in September to 2.985 billion barrels; around 154 million barrels above the five-year average.

By that argument, things are proceeding at pace. Yet, at the same time U.S. production continues to rise, currently around 9.4 million bpd, and tipped to rise above 10 million bpd at the very least in 2018. It then begs the question what is OPEC’s exit strategy, if indeed it has one.

Courtesy: www.forbes.com