Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Don't Hold Your Breath For Deeper OPEC Cuts
Oil Price, Al-Jazeerah, CCUN, July
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The rally in oil prices over the past two weeks came to a
halt on Wednesday on news that OPEC is actually exporting more oil than
A month ago, oil prices appeared to be
higher than they should have been, with weak demand, elevated
inventories, and a recognition that the nine-month OPEC extension would
be inadequate to balance the market. Oil sold off and dropped to the
mid-$40s and below. Oil traders then bought on the dip, and bid prices
back up over the past two weeks. Now, prices again look like they could
be reaching an upper limit.
"The air is getting thin for oil
prices. The price increase just ran out of steam, which is not very
surprising, given the newsflow of rising OPEC supplies," Carsten
Fritsch, senior commodity analyst at Commerzbank, told
According to Reuters data, OPEC exports jumped
again in June, the second consecutive month of rising exports. Everyone
tends to pay attention to the production data, but the volume of exports
is arguably much more important. Reuters says that OPEC's oil exports
rose to 25.92 million barrels per day (mb/d) in June, an increase of
450,000 bpd from May.
More importantly, OPEC's exports are
actually 1.9 mb/d higher today than they were a year ago, despite the
highly-touted compliance rate with the collective production cuts.
Reuters columnist Clyde Russell
calls OPEC's efforts to balance the oil market “an exercise in
self-deception.” It appears that OPEC is exporting just as much oil as
it was before the November deal was announced, according to a Reuters
analysis of oil tanker data. The UAE, for example, exported 2.8 mb/d in
the first six months of 2017, higher than the 2.52 mb/d the country
averaged in the same period a year earlier. Iran too is exporting more
than last year.
Then, of course, there are the countries
exempted from the deal – Libya and Nigeria – where exports are rising
quickly. Libya's exports only averaged 243,000 bpd in the first half of
2016, a figure that doubled to 553,000 bpd this year. Libya's production
recently topped 1 mb/d, so its exports are surely set to rise further.
Ultimately, this means that OPEC's oil exports are not all that
different from last year's figures even though it has claimed success
with the collective cuts.
That raises the question about whether
or not OPEC should make deeper cuts, an approach that a growing number
of analysts say is needed to balance the market.
Bloomberg recently noted, another cut would be consistent with
OPEC's own history. In the past, OPEC conducted multiple cuts over a
short period of time, tweaking their output levels in order to achieve a
targeted outcome. “In the past if it didn't work, OPEC would adjust
lower,” Mike Wittner, head of oil market research at Societe Generale
SA, told Bloomberg. “It's a process. That's what supply management
means.” It would be an “outlier” if this time they cut only once.
However, the one major reason why a follow-up cut would be more
difficult is the presence of rapid-response U.S. shale. Shale drillers
have already brought back a lot of production since last year, so deeper
cuts could simply open up more room for them. While some analysts are
pointing to the possibility of shale production
starting to slow, that would support the notion that the industry
responds very quickly to changing market dynamics. That responsiveness
takes away some leverage from OPEC and undercuts the rationale for
Moreover, it would be very difficult to get all
participants on board for deeper reductions. Russia, a crucial non-OPEC
producer that has leant weight to the deal, has poured cold water on
speculation about the possibility of deeper cuts. Four Russian officials
said they would oppose any proposal for more aggressive action.
The officials even argued that another cut so quickly after the
group agreed to a nine-month extension could backfire. The hasty move
would be viewed by the market as a panicked decision, a recognition that
what they have been doing is wholly inadequate to balance the market.
Oil traders might interpret an attempt to lower output as very bearish
rather than bullish.
As a result, we will probably be stuck with
the current trajectory – muddling through for another year or so with
modest drawdowns in inventories, and oil prices stuck in its current
range between $40 and $60.
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