OPEC, Russia agree oil output cuts
High US production is the biggest problem while cutting supplies
1 December, 2017
OPEC and non-OPEC producers led by Russia agreed to extend oil output cuts until the end of 2018, news wires reported from Vienna last Thursday. Russia, which this year reduced production significantly with OPEC for the first time, has been pushing for a clear message on how to exit the cuts so the market doesn’t flip into a deficit too soon, prices don’t rally too fast and rival US shale firms don’t boost output further.
The deal to cut oil output by 1.8m barrels a day was adopted last winter by the 14-member OPEC cartel, Russia and nine other global producers. The initial agreement was due to end in March 2018, having already been extended once. Rather than extend the deal by nine months, the group said on Thursday it was implementing a new deal that will last from January to December of 2018. At the meeting in Vienna, OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8m bpd. Both countries have been exempt from cuts due to unrest and lower-than-normal production.
A joint OPEC and non-OPEC communique said the next meeting in June 2018 would present an opportunity to adjust the agreement based on market conditions. With oil prices rising, Russia has expressed concerns that an extension for the whole of 2018 could prompt a spike in crude production in the US, which is not participating in the deal. Russia needs much lower oil prices to balance its budget than OPEC’s leader Saudi Arabia, which is preparing a stock market listing for national energy champion Aramco next year and would hence benefit from pricier crude.
One of OPEC’s biggest problems while cutting supplies has been rising US output, which is gaining global market share and undermining the group’s efforts to tighten the market. Rystad Energy, a consultancy, said it expects US oil production to reach 9.9m bpd in December, which would bring it close to top producers Russia and Saudi Arabia.
Amid strong demand for oil and a reduction of its production in the OPEC+ countries, the World Bank forecasts an increase of the average price of a barrel of oil in 2018 to $56 from $53, the bank said in its Russian Economic Report released last Wednesday. At the same time, the World Bank admits there are some risks to the forecast. Supply to the global market from politically stressed oil producers, including Iraq, Libya, Nigeria, and Venezuela, could be volatile.