13, September 2017

Opec Cuts: An Open Question

In recent days we’ve heard about a meeting between Saudi Arabia’s Energy Minister Khalid al-Falih and his counterparts from Venezuela and Kazakhstan to discuss the possibility of extending the so-called output cuts agreement beyond the March 31, 2018 deadline.

But al-Falih went a step forward and also got in touch with Russia’s Energy Minister Alexander Novak, a key non-OPEC player and architect of the current production deal.

The big question for market players is whether further output cuts will benefit OPEC’s position in the market, because despite pushing prices upwards, the oil cartel and external producers participating of the agreement are also gradually losing market share.

Let’s see what we’ve got until now. The first OPEC + non-OPEC agreement pushed Brent crude contracts up to nearly $57 per barrel and WTI to $54 per barrel in January 2017.

However, prices have been correcting downwards ever since, especially after the parts involved announced back in May the decision to extend the deal further from the original deadline of June 30, 2017 for a nine-month period until March 2018.

So what happened? Simply said, traders felt disappointed due to the fact that cut volumes remained untouched at 1.8 million barrels per day. Markets had speculated with a revision of the reduction target that was never actually materialized.

On Tuesday, OPEC said it produced 32.76 million barrels a day in August, which is 79,100 barrels a day less than the previous month reading. This figure is relevant as it represents the first output decline since March.

Compliance with the terms is another key aspect to understand the relevance this output deal has on crude prices. The International Energy Agency reported in July that OPEC’s compliance with cuts dropped to its lowest in the last six months.

Meanwhile, Libya and Nigeria, the two only OPEC members that were allowed not to participate in the deal continue to increase their production.