VIENNA – The OPEC oil cartel and other producers, notably Russia, are this week expected to extend last year’s production cut in a concerted attempt to prevent oil prices from falling.
With prices likely to fall because of an oversupply in the market if they don’t, both Russia, and OPEC oil giant Saudi Arabia have spoken out in favour of an extension ahead of Thursday’s meeting.
Last November, in a groundbreaking move to push prices higher, the 13-country Organization of the Petroleum Exporting Countries agreed to cut production by 1.2 million barrels a day, while non-OPEC countries chipped in a with a further 600,000 reduction. That deal, which has helped shore up oil prices, is due to expire at the end of June.
Saudi Energy Minister Khalid al-Falih noted a “trend” among participants to prolong the cuts for nine months, while OPEC Secretary General Mohammad Barkindo said there is “growing consensus” for an extension. Non-OPEC countries will attend the meeting, including Russia’s Energy Minister Alexander Novak.
There’s even speculation that there may even be an agreement for deeper cuts.
In the longer term, there are concerns among OPEC countries that higher oil prices may end up being counterproductive as they encourage U.S. shale gas producers to re-enter the market — a development that could weigh on oil prices.
Despite last year’s production cuts, oil prices have risen by less than OPEC hoped for. At around $50 a barrel, benchmark crude is up from the sub-$30 levels reached in early 2016. Still, prices are around half the levels reached in 2014. Financial information firm IHS Markit sees OPEC revenues showing a modest gain this year after dropping from their peak of $1.2 trillion in 2012. The total, it said “will be less than half the level of 2012, when prices were more than double current levels.”
U.S. output since last year’s cut has increased by nearly a million barrels a day to a daily 9 million barrels. That already puts American production up there with Saudi Arabia and Russia and cuts further into OPEC’s past ability to play a role in setting prices and supplies
More than 400 oil rigs are now working U.S. shale fields — an increase of more than 120 per cent compared to a year ago. And U.S. producers are poised to expand more.
Additional psychological pressure on OPEC is coming from U.S. President Donald Trump. As part of his proposed budget, he called Tuesday for the sale of half of the country’s strategic oil reserves, which stands at 688 million barrels.
It is unclear if Congress will approve the initiative. Even if it does, the drawdown would extend over 10 years. Still, for OPEC, the timing of the proposal was unfavourable, coming just two days before the ministers meet.