In roughly four weeks’ time, OPEC and Russia will meet in Vienna to assess how well their agreement to cut oil production has performed. They’ll have a hard time getting over the fact that since they started cutting production, stockpiles have grown.
This week it led to a rough ride for prices, with headlines screaming ‘Oil has had its worst day since March!’ WTI closed on Wednesday at $50.26 per barrel, after the U.S. Energy Information Administration reported that stocks of crude oil had fallen by 1 m barrels – instead of the 1.5 m that had been anticipated.
It wasn’t what the market wanted to hear after the previous week when the International Energy Agency had revealed that inventories in industrialised countries remained marginally above the five-year average.
How did this happen? Well, when OPEC agreed in principle in September 2016 to reduce output, nothing was actually going to come into force until January 1st 2017. Naturally, members went hell for leather boosting production – in November the output hit a record high in recent times of 34.19m bpd. Just one month prior to that the output had been 33.82m bpd. Citigroup summed it up perfectly, saying OPEC had been ‘hoisted by its own petard’.
Since January 1st, it has done rather well at ensuring the group stuck to the deal. Unfortunately for OPEC it has also been hostage to fortune. Although compliance saw the price recover from the pits – those gains emboldened U.S. shale producers. Data from Baker Hughes suggests output is rebounding in the U.S. with explorers adding rigs for over three months.
Unsurprisingly Patrick Pouyanné the chief executive of the French oil and gas company Total predicts a slide in oil prices by the end of the year – and last week wasn’t shy about putting the blame firmly on the shale drillers. “The price may fall again. U.S. producers who have recovered quickly, will regenerate an influx of supply by the end of the year and this could have a negative impact on the markets.”
It would be wrong not to promote the excellent quote obtained by worldoil.com from Eugen Weinberg, head of commodities research at Commerzbank who said: “OPEC is like a magician waving his hands and trying to pull the rabbit out the hat, but still the rabbit isn’t there. They’ve done all they can with the production cuts and the effect is close to non-existent.”
However carry on they likely will. According to Bloomberg, Khalid Al-Falih told guests at a conference in Abu Dhabi that "There is an initial agreement that we might be obligated to extend to get to our target.” It’s clear not everyone is fully on board, as he later told reporters that “Consensus is building but it is not done yet. We’re still in consultations.”
It’s interesting how few public calls have been made for U.S. producers to show an understanding of the market. Mohammed Barkindo, the secretary-general of OPEC said at that conference that the measures taken by OPEC and non-OPEC had put the oil market “on the path to recovery”. He added “Our collective action will continue to prove effective.”
But as Einstein put it: “The definition of insanity is doing the same thing over and over again, but expecting different results.” Without buy-in from the U.S., it’s hard to see how that can work out.
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