OPEC cuts crude production, stabilizes oil prices after slide
The Houston energy sector may have dodged another oil bust as OPEC, Russia and other producers agreed to cut production through the first half of 2019, stabilizing crude prices that had fallen sharply over the past several weeks.
The deal, unveiled Friday in Vienna, aims to take about 1.2 million barrels a day of crude from the market and head off a glut that was developing as global production — led by U.S. shale drillers — surged, demand weakened and stockpiles climbed. In a matter of weeks, prices plunged from more than $76 a barrel to just over $50, recalling the events of four years ago, when OPEC, facing similar conditions, decided to forgo production cuts and spurred the worst oil bust in a generation.
Oil prices jumped by about 5 percent shortly after the deal was made public, and settled in New York at $52.61, up about 2 percent. Mike Bradley, who was in Vienna for the Houston energy investment bank Tudor, Pickering, Holt & Co., described the week’s developments as a roller coaster ride that started optimistically, sunk to gloom when no deal was struck Thursday, and recovered the next day when the agreement was reached.
“There was a lot of relief,” said Bradley. “It would’ve just been horrible for the Houston area, jobs and services. The playing field is at least balanced now.”
The nation’s oil and gas sector is still recovering following the oil bust that began in 2014, cost tens of thousands of jobs and pushed scores of companies into bankruptcy. But as prices climbed over the past year, production has surged to new records, led by the Permian Basin in West Texas.
U.S. producers are pumping an estimated 11.7 million barrels day, with output in the Permian hitting 3.7 million barrels a day — about one-third of all U.S. production. That output helped increase U.S. crude inventories by millions and fueled concerns that supply was again outstripping demand.
Unlike many other oilproducing nations, the United States government
doesn’t control its oil industry and can’t order companies to cut production. That has left it to OPEC and Russia, which have formed an alliance called OPEC+, to try to manage the global oil supply.
The agreement reached in Vienna involves OPEC cutting production by 800,000 barrels a day. That’s an average cut of 2.5 percent per OPEC nation, excluding the exempted countries of Iran, Venezuela and Libya, all of which are dealing with diminished output from internal conflicts or, in the case of Iran, U.S. sanctions.
Saudi Arabia will start cutting in January, taking the bulk of the OPEC reductions by lowering output from 10.7 million barrels a day to 10.2 million barrels, said Saudi energy minister Khalid Al-Falih. Other OPEC nations such as the United Arab Emirates and Kuwait are expected to take sizable cuts as well.
Another 400,000 barrels per day in additional cuts would come from Russia and other non-OPEC allies scaling back production
by an average of 2 percent. Russian energy minister Alexander Novak said that’s an eventual cutback of about 230,000 barrels daily for Russia from its 11.4 million barrel per day output in October.
“This is a very strong signal to anyone who has doubted us,” Novak said at the final press conference in Vienna.
Oil markets hoped OPEC+ could reach agreement on bigger cutbacks, but analysts said the deal is close to the best, realistic outcome. “This wasn’t a home run for OPEC,” said Clay Seigle, managing director for oil at the energy research firm Genscape, “but it was at least a base hit.”
Most U.S. energy companies need oil closer to $60 a barrel than $50 to remain healthy. Anything above $60 is a boon for the vast majority of the industry.
OPEC last failed to act in late 2014 as oil prices were sliding from a peak of more than $100 a barrel. That inaction accelerated the fall in prices and helped trigger
a prolonged oil crash, reaching bottom at $26 a barrel in early 2016.
Later that year, Russia and Saudi Arabia, now the world’s second and third largest producers, formed an alliance and the burgeoning OPEC+ group was formed. They agreed to cut production, lifting prices and ending the bust.
With the oil glut drained, OPEC and Russia last summer increased output, in part to avoid potential shortages as production in crisis-ridden Venezuela continued to fall and U.S. sanctions on oil exports from Iran were taking effect. But the increases in production have come faster than expected. And the White House unexpectedly issued waivers from Iran sanctions to some of the world’s biggest energy consumers such as China and India, keeping more oil on the market
OPEC said Friday it will move up its next meeting from June to April so it can assess how the deal is progressing and decide on possible adjustments if the waivers expire and Iranian exports are withdrawn from the market.
One concern is the Saudi-Russian alliance has begun to overwhelm OPEC to the point that Qatar, an enemy of Saudi Arabia, opted this week to pull out of the cartel.
Qatar, however, is primarily a natural gas producer that doesn't pump much oil, so the effect of global supplies should be minimal.
The tweet factor
President Donald Trump, however, is a working against output cuts, arguing via Twitter that lower oil prices mean lower gasoline prices, which are good for American consumers.
The counter argument is low oil prices cripple a growing energy sector and cost states like Texas many thousands of jobs and the U.S. economy billions of dollars that come into the country from increasing crude exports.
The Saudi energy minister emphasized that U.S. oil companies are breathing a sigh of relief because of the OPEC+ deal, even if Trump disapproves. “I think we can continue to coexist with reasonable
growth along with U.S. shale,” Al-Falih said.
He cautioned, however, that Saudi Arabia isn’t willing to cut production by millions of barrels if U.S. production keeps growing for years on end.
“If we find out we are having to cut unreasonably,” he said, “then that’s when we’ll we say we can’t do it any more.”
OPEC President UAE Energy Minister Suhail al-Mazrouei addresses a meeting in Vienna, where oil prices were discussed.