OPEC, allies extend oil-output cut
Goal of lifting prices met, strategy to run at least through ’18
VIENNA — The OPEC cartel and a group of allied oil-producing nations agreed Thursday to prolong crude output cuts until the end of next year, extending a policy that has led to a significant rise in the price of oil over the past year.
At the same time, the 24-nation alliance led by OPEC member Saudi Arabia and Russia gave notice that they stand ready to revisit the move, should price increases bring U.S. shale operators — who had suspended operations while crude was cheap — back into the market in force.
“We are going to be agile, depending on how events unfold,” Saudi Arabian oil minister Khalid Al-Falih said. Announcing the decision after a day of meetings, he declared, “it’s been a great day.”
After a day of talks in Vienna, the decision showed the strength of the unprecedented alliance between the world’s top two oil producers, Saudi Arabia and Russia, and confounded Wall Street analysts who predicted the Russians would be reluctant to keep going. The deal was even beefed up through the inclusion of Nigeria and Libya, two OPEC members originally exempted from the curbs.
“We are united, shoulder to shoulder,” Al-Falih said sitting next to his Russian counterpart Alexander Novak at a news conference after the meeting. “We are completely aligned.”
The success of the strategy has been reflected by crude’s rise. Benchmark oil prices are now close to $60 a barrel, depending on the grades, up almost 20 percent since a year ago. On Thursday, West Texas Intermediate crude for January delivery rose 10 cents to settle at $57.40 a barrel on the New York Mercantile Exchange. Oil prices rose 5.6 percent in November in New York trading. They have risen about 17 percent since the last time producers gathered for an official meeting back in late May.
The national average retail price for gasoline Thursday was $2.50 per gallon, up from $2.15 per gallon a year ago, according to auto club AAA. The average price Thursday in Arkansas was $2.27.
The increase in crude prices partly reflects a rise in global economic growth since last year. It is also attributed to the OPECled decision last year to limit production, renewing the cartel’s reputation as a major player in controlling the oil market.
“Fundamentally, the cuts have worked well,” Patrick Pouyanne, chief executive officer of French oil major Total SA, said at a news briefing in Antwerp, Belgium. “I’m not surprised they decided to extend.”
After decades of being a dominant force in determining supplies and prices, OPEC’s role as a key regulator began to fade in recent years, as U.S. shale producers started pumping up their output. That led to oversupply and a steep fall in prices from over $100 to below $40 a barrel by last year, leading to the decision to join key non-OPEC nations and jointly pump less crude.
But the strategy of continued cuts to drive up prices may not be sustainable over the longer run, and OPEC may yet see its influence wane again. With prices now at two-year highs, U.S. producers who mothballed operations when oil was cheap are returning to the market in force. U.S. oil producers need relatively higher market prices to break even than, say, Saudi Arabia. So the recent rise is encouraging more to start pumping again.
U.S. crude oil production already has grown by 15 percent since last year to nearly 10 million barrels per day, just behind Russia and Saudi Arabia. The International Energy Agency expects the U.S. to become the biggest net exporter by the end of the 2020s.
Iranian Oil Minister Bijan Namdar Zanganeh told reporters that Nigeria and Libya had agreed to a collective output cap of 2.8 million barrels a day. Nigeria pumped 1.73 million barrels a day in October and Libya 980,000 a day, according to data compiled by Bloomberg.
The extra crude is welcome for now, with the global economy booming. But at some point the balance could again tip from relatively tight supplies to an oversupply, and a drop in prices.
OPEC will meet again in June to review the status of the accord, not to map out an exit strategy, Nigeria Oil Minister Emmanuel Kachikwu said at the Vienna meeting.
Russia’s Novak said the June meeting will provide the chance to assess what needs to be done.
“The market is getting most of what it expected,” Rob Haworth, who helps oversee $150 billion in assets at U.S. Bank Wealth Management in Seattle, said by telephone. “Even though they are extending, they are doing it cautiously.”