OPEC's Oil Production Cuts Could Last Longer

- July 24th, 2017

OPEC and other major oil producers agreed to reduce output at the beginning of the year, but it’s taking longer than expected for the cuts to stabilize prices.

Oil prices rose slightly on Monday (July 24) on the news that the Organization of the Petroleum Exporting Countries’ (OPEC) restrictions on oil output could be extended beyond Q1 2018. 
OPEC members and other major oil-producing nations signed a historic deal last year to cut output by a combined 1.8 million barrels a day for six months starting in January 2017. In May, they agreed to extend the cuts until the end of next year’s first quarter.
News that the cuts could last even longer came after a meeting of the Joint OPEC/Non-OPEC Ministerial Monitoring Committee (JMMC), a group set up to monitor the pact. Held in Russia on Monday, the meeting’s primary purpose was to review what effect the cuts have had in their first six months.

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In a press release, JMMC says that while “the oil market is making steady and significant progress towards rebalancing,” with many countries complying with output restrictions, “there is still room for improvement by some participating producing countries.”
The committee adds that it has “had serious discussions with [non-compliant] countries” and has demanded that they promptly reach full conformity. While some countries have cut output by more than what they pledged, others, such as the United Arab Emirates and Iraq, have “shown relatively weak adherence to limits,” says Reuters.
Saudi Arabia is one country that has reduced production more than required, and it said on Monday that it will limit its output to 6.6 million barrels per day in August, down by about 1 million compared to the year-ago period. Bloomberg points out that Saudi Arabia has also been taking other actions to reduce the world’s persistent oil glut and raise prices.
Prices neared $60 per barrel in January after the cuts began, but since then have fallen below $50. While non-compliance from some of the countries that agreed to cut output has been an issue, higher output from US shale producers has also drastically reduced the impact of the cuts.
Rising production from OPEC members Nigeria and Libya also has not helped. Both countries were originally not asked to cut production as their oil sectors are still recovering from years of unrest. However, JMMC notes that Nigeria has now agreed to make cuts if its output climbs to over 1.8 million barrels a day. It was producing at a level of about 1.6 million barrels a day in June.
The committee believes that Libyan output is unlikely to exceed 1 million barrels per day in the near future, and has not suggested capping output in the country.
OPEC and the other countries that have committed to reducing production are hoping to bring global oil inventories down to the five-year average for industrialized nations. Stocks are currently still 250 million barrels above that level.
West Texas Intermediate crude for September delivery was up 0.9 percent Monday morning, trading at $46.19 on the New York Mercantile Exchange. Meanwhile, September Brent crude was sitting at $48.48 on London’s ICE Futures Exchange, also up 0.9 percent.
The JMMC is scheduled to meet again in September, though it could meet earlier if necessary.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

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