OPEC has little choice but to stick with its plan to boost oil prices by cutting production, even though that plans seems to have fizzled.
Since the Organization of Petroleum Exporting Countries first agreed production cuts in November, crude has surrendered all of its gains. The fact that the world’s three-year crude glut isn’t shifting is showed by a rebound in U.S. shale output and stubbornly high stockpiles even while the group has implemented the curbs. The rout has not stopped even after signals from Saudi Arabia and Russia that they’ll prolong the supply reductions.
Yet it is almost certain to persevere because the alternatives look even worse and OPEC has limited room for maneuver when it meets on May 25 in Vienna to discuss the deal. According to UBS Group AG, even more shale supplies might come along to fill the gap if it were to deepen the cutbacks. Citigroup Inc. predicts that the economic pain of crude below $40 would be inflicted by abandoning the policy and restoring output.
“The risk of a higher cut is that it could trigger too strong an increase in prices and support U.S. shale,” said Giovanni Staunovo, an analyst at UBS in Zurich. “If they change strategy, Saudi Arabia would lose face. You can’t say you want lower inventories, and after a few months give up.”
His country was “inclined toward” an extension of production cuts into the second half, said a statement from Russian Energy Minister Alexander Novak. But the selloff came even after that. There’s a preliminary consensus to prolong the agreement with backing from other OPEC nations such as Kuwait and Iraq, said the Saudi Energy Minister, Khalid al-Falih, on April 26.
Now OPEC has little ammunition left in its battle to raise prices with the group already showing near-perfect compliance in delivering its pledged 1.2 million barrel-a-day production cut and an extension looking likely.
“The OPEC deal was doomed to failure from the very beginning,” said Eugen Weinberg, head of commodities research at Commerzbank AG. “If they deepen the cut, the effect will be short-lived. OPEC will find itself in the same position again in six months time, but non-OPEC would get more market share by then.”
Data available right now show few signs of success, even as the International Energy Agency still predicts a rapid reduction in the supply glut in the second half of this year if OPEC maintains its cuts.
The IEA estimates that during the first quarter, global fuel stockpiles may have actually increased. crude inventories remain near record levels but are dropping in the U.S. — the world’s biggest consumer. Meanwhile, according to the Energy Information Administration, noting the highest level in almost two years as investment returns, American production has roared back, growing by 523,000 barrels a day this year.
According to Energy Aspects Ltd, OPEC can still succeed if it stays the course even though there’s a sense of “dejection” in the market that the cuts aren’t working.
“We still think the market does rebalance by the end of this year as long as OPEC continues its production cuts,” Amrita Sen, chief oil analyst at the London-based consultant, said in a television interview. “I don’t think they have many options.”
(Adapted from Bloomberg)