The oil stockpile surplus weighed on prices for three years and brought oil dependent nations like Nigeria to their kneel, is all but gone, but instead of celebrating victory some of the world’s largest producers have reasons to continue cutting output.
OPEC and Russia’s historic output cut agreement has achieved impressive results, wiping out 97 percent of the targeted inventory surplus according to analysts.
Still, the curbs look to continue because another important goal — boosting investment in oil and gas production — remains far out of reach, said Saudi Energy Minister Khalid Al-Falih.
There’s nothing to fear from prices rising even further from their current three-year high, he said.
His most important ally, Russian counterpart Alexander Novak, agreed there’s no obligation to stop just because the pact’s initial goal — stockpiles back in line with the five-year average — is at hand.
“We have our targets, but there’s no strict formula under which we would decide: ‘Well, we’ve reached zero, so we are done’,” Novak told reporters at the opening session of the group’s meeting in Jeddah, Saudi Arabia on Friday.
OPEC and Russia have almost wiped out the oil glut, but want to keep cutting to boost prices
Source: International Energy Agency, Organization of Petroleum Exporting Countries
Crude has surged to a three-year high and the glut that triggered the deepest oil-industry downturn in a generation is all but gone. Yet OPEC’s choke-hold on its own production is only getting tighter. As oil ministers gathered in the Saudi city that neighbors Mecca for the meeting of the Joint Ministerial Monitoring Committee, the $80 a barrel the kingdom desires was inching closer.
Energy ministers didn’t make any new recommendations or adjust their targets in Jeddah, according to people familiar with the matter. Still, they did give a strong signal of their intentions after more than a year of production cuts and rising prices. Based on recent market data, they would have some justification in declaring victory and phasing out their supply deal, but all indications were that they’ll keep on going at least until the end of 2018.
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While soaring U.S. shale production remains a nagging concern, the key players appear to be more fixated on the immediate benefits of high crude prices. Saudi Arabia needs to cover weighty domestic spending and attract investors to a partial sale of its state oil company, Aramco. Russia is relishing its new role as a major Middle East power broker, while also enjoying bigger financial gains than anyone from the accord.
“Russia is keeping all options open and Saudi Arabia is talking about a 2019 extension,” UBS Group AG analyst Giovanni Staunovo said by email. “Status quo for the time being is still the best choice,” although the outcome of the group’s next meeting in June will depend on inventory and production levels.
Russian Minister Novak wouldn’t rule out some easing of the production cuts this year, but said it would depend entirely on the situation in the market. For now, the group is cutting ever deeper, and Saudi Arabia’s Al-Falih chided nations that haven’t been implementing their fair share of the curbs at the opening session of the Jeddah talks.
Overall, OPEC and its allies cut 45 percent to 49 percent deeper than the agreed 1.8 million barrels a day in March, ministers said. That’s the biggest reduction ever and compares with 38 percent over-compliance in February.
