OPEC and non-OPEC nations poised to extend output cuts

Khalid Al-Falih, minister of energy, industry and mineral resources of Saudi Arabia, leaves the building of the Organization of the Petroleum Exporting Countries (OPEC) at their headquarters in Vienna, Austria, Wednesday, May 24, 2017. 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 favor of an extension ahead of Thursday’s meeting. (Photo by RONALD ZAK / AP)

VIENNA — OPEC and other oil nations meeting Thursday appeared set to extend their production cuts in an effort to shore up prices. But the intended impact could be short-lived.

That’s due to US shale producers. With crude prices above $50 a barrel from lows of last year, they are increasingly moving back into the market. Their output already is partially offsetting the cuts, and even more US companies are poised to return if prices rise further.

The upshot is that the price of oil – and derived products like fuel – is unlikely to increase much in coming months, analysts say. That will be welcome news to consumers and energy-hungry businesses worldwide but could continue to strain the budgets of some of the more economically-strapped oil-producing nations, like Venezuela and Brazil.

The latest reductions have been in effect since November, when the 13-country Organization of the Petroleum Exporting Countries agreed to cut production by 1.2 million barrels a day. Non-OPEC countries led by Russia chipped in with a further 600,000-barrel reduction.

With the deal due to expire at the end of June, OPEC oil ministers spoke of consensus to prolong it up to nine months even before they sat down to make a formal decision.

Saudi Energy Minister Khalid al-Falih noted a “trend” to extend. OPEC Secretary General Mohammad Barkindo said there is “growing consensus.” Iranian oil minister Bijan Namdar Zanganeh told reporters there was already apparent unanimous consent “to continue the cut that we had in November.”

Jabbar Ali Hussein Al-Luiebi, his Iraqi counterpart, said “We support the proposal for nine months,” while a committee of all nations participating in the cuts also are recommending a nine-month extension on Wednesday.

But even with the reductions, oil prices have risen less than OPEC hoped for from last year’s levels. At over $50 a barrel, benchmark crude sits substantially below the highs reached in 2014, but is priced high enough to bring back into the market US producers who eased back as prices tumbled last year. US shale production requires a higher price to be profitable.

US output since last year has increased by nearly a million barrels a day to a daily nine million barrels. That already puts American producers in the league with oil giants 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 US shale fields – an increase of more than 120 percent compared with a year ago. And US producers are poised to expand more, even if prices tick upward only moderately as a result of an oil-cut extension by OPEC and its partners.

Commerzbank cited data from the US Department of Energy saying US production was roughly 540,000 barrels per day higher in mid-May than at the start of the year.

“This offsets nearly half of OPEC’s production cuts,” it noted.

Even a decision to maintain oil cuts thus is likely to only kick the can down the road from Thursday’s meeting until OPEC ministers convene again late this year. Crude prices are unlikely to rise substantially – and that means the era of windfall profits appears to be over for member nations, at least for now.

While an HIS Markit research note sees OPEC revenues showing a modest gain this year after dropping from their peak of $1.2 trillion in 2012, “the total will be less than half the level of 2012, when prices were more than double current levels.”