OPEC extends output cut, oil price increase unlikely
VIENNA — An alliance of many of the world’s biggest oil-producing nations extended their agreement to cut output for an additional nine months — an effort to support prices that will prove difficult in the face of growing production from the U.S.
Thursday’s decision by the OPEC cartel — now at 14 members with the entry of Equatorial Guinea — and 10 other countries led by Russia, means that the reductions of 1.8 million barrels a day agreed on in November will stay in place until March.
Saudi Oil Minister Khalid Al-Falih, who presided over the meeting, said he expected that the extension should reduce high crude inventories to a level corresponding to “the five-year average by the end of the year.”
Less oil on the market normally means higher value per barrel. But any uptick in prices may be modest and temporary.
The OPEC alliance faces competition from U.S. shale producers. Many have returned to the market since crude prices have risen from last year’s lows to over $50 a barrel, and more are set to resume operations if crude prices go even higher.
That could increase supplies and drag down prices again.
Investors seemed to focus on that reality on Thursday, when they pushed the price of crude to levels seen before OPEC’s meeting in November. The U.S. benchmark for crude was down $2.25 a barrel at $49.11.
The upshot is that the price of oil — and derived products like fuel — is unlikely to increase much in coming months. That will be welcome news to consumers and energy-hungry businesses worldwide but could continue to strain the budgets of some of the more economicallytroubled oil-producing nations, like Venezuela and Brazil.
Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions, said that the countries that had agreed to the
cut had complied by easing production but continued to export at high levels from existing inventories.
“This is significant in partially explaining why crude stocks ... have stayed so high,” she said.
Al-Falih dismissed the market reaction on Thursday, noting that world economies are growing and continue to depend largely on crude as their lifeblood.
“I never worry about the daily reaction of the market,” he told reporters.
The decision extends a cut of 1.2 million barrels a day by the Organization of the Petroleum Exporting Countries. Non-OPEC countries led by Russia chipped in with a further 600,000-barrel reduction.
U.S. output ratchets up
The problem for OPEC is that while crude sits substantially below the highs around $100 a barrel reached in 2014, it is high enough to bring back into the market U.S. producers who eased back as prices tumbled last year. U.S. shale production requires a higher price to be profitable compared with traditional crude oil.