OPEC in Kuwait to verify extent of production cuts
The committee for monitoring production cuts, which is headed by Kuwait, will meet soon to verify the extent of production cuts.
The Kuwait meeting will not come up with any firm promises by OPEC and Russia to cut production by 1.8 million barrels per day. Since the beginning of December, the oil prices began to improve and hit $57 per barrel. All oil-producing countries were jubilant that the oil prices have finally begun to pick up and are expected to be smooth sailing for the rest of the year.
It seems our jubilation did not last long, as the oil prices are nearing $50 and there are no indications of any real reduction in the oil surplus in the market, which is more than 200 million barrels. However, this is not due to non-compliance by OPEC and Russia, as the compliance rate is more than 85 percent and there has been no cheating this time. It is because of the revival of the USA shale oil in a calm manner. It seems shale oil needs some comfort zone of stable and steady oil price in order to pick up again without any threats of further weakening of oil prices.
This time, OPEC is facing a new threat, as the trick of reducing production is not workable because it gives the enemy sufficient period for ensuring stability of shale oil again.
The Kuwait meeting will end with a clear certificate of compliances and perhaps higher level of adherence than in the past. It will recommend continuing the path of production cuts, if not more cuts. However, this is the dilemma that conventional oil producing countries are facing.
The more they cut, the higher the temptation for shale oil producers to seek more rigs and further production, as they would be safely secure and more stabile. It will be an opportunity of being secure under the guarantee of OPEC to continue oil reduction.
So what can be done now? What further actions will be taken by OPEC next May? How to move forward? Of course, it still has two month to watch and observe the markets. However, oil producing countries just cannot compete with shale oil companies, as they dig deep in their pockets to reduce costs.
This we simply cannot do, even though our production cost, which is less than $10 per barrel for most Gulf oil producers, is increasing but our annual expenses in meeting our budgets require the oil price to be more than $65 per barrel.
Any level below this means further borrowings from international banks, and further misery. On the other hand, such a level will be like heaven for shale oil producers, ensuring huge rewards for its shareholders.
OPEC is facing a hard time, as it simply can neither go ahead with the status quo option nor free the production levels because it will mean further weakening of oil prices which will fall below $40 level in no time.
The only option available to OPEC is further oil production cuts. It will generate better cash flow than any figure if oil price is below $40 per barrel, as we are in need of cash much more than shale oil producers. OPEC is in need of an oil price level of $69 and more, while shale oil producers can be happy with an oil price level of $50. This is the challenge for OPEC from now onwards.