The OPEC cartel of mostly Middle Eastern oil producers last night announced that it is extending its self-imposed reduction in output by nine months to March 2018 in a bid to drive up crude prices after seeing prices halve and revenues drop sharply in the past three years.
OPEC first imposed a six month cut in January this year after crude oil prices slumped to a 12-year low of around $30-barrel. This has helped to push oil back above $50 a barrel this year, giving a fiscal boost to producers.
In December, OPEC agreed its first production cuts in a decade and the first joint cuts with non-OPEC producer nations, led by Russia, in 15 years. They decided to remove about 1.8 million barrels per day (bpd) from the market in the first half of 2017 – equal to 2 percent of global production
Since then, however, the oil price rise this year has spurred growth in the US shale industry, which is not participating in the output deal, thus slowing the market’s rebalancing with global crude stocks still near record highs.
The nine-month extension of the reduction in OPEC cuts from output levels in October 2016 was largely expected by the market. By 1430 GMT, Brent crude LCOc1 was 0.7 percent down at around $53.50 per barrel.
As a result, OPEC faces the dilemma of not pushing oil prices too high because doing so would further spur shale production in the US – which now rivals Saudi Arabia and Russia as the world’s biggest oil producer.
A Texan oil veteran commented: “Less OPEC oil on the market enhances the opportunity for American (US) energy to fill needs around the world, and will help us achieve energy dominance.”
And London trader Neil Wilson at ETX Capital said that OPEC had “bottled it”, adding:
“A nine-month extension just isn’t enough to really lift oil prices as we’ll continue to see US shale fill the gap.
“Having said they’d do whatever it takes, OPEC is looking a bit toothless now.”