The possibility of the various forces at play between the members of the Organization of Petroleum Exporting Countries, OPEC, reaching an agreement to cut production seemed bleak. Surprisingly though, they pulled it off. And to add the cherry to the cake, another non-OPEC member, Russia, participated and agreed to cut production. In the markets, the reaction was spontaneous. Prices of the various grades of crude oil increased and kept this trend for a few days. But it seems that the euphoria is now over. The recent drop in the prices of some grades of crude oil suggest that the cuts agreed upon by OPEC members and Russia may not be adequate to push market prices significantly higher.
First, signs of the problems were always there, even during the meeting by the oil club and Russia. Russia agreed to cut its output by 300,000 bpd from its November figures which were the highest in over 30 years. The production cut agreed upon would imply that Russia would still be drilling about 11 million bpd, a figure higher than it was at the peak of the oil glut in the first half of 2016.
Secondly, the matter of the U.S shale oil production has not been treated adequately. “The U.S. oil rig count continued its rally this week, up by 3 rigs…Since its trough on May 27, 2016, producers have added 161 oil rigs (+51 percent) in the U.S.,” Goldman Sachs said. This indicates that the production from the US will continue to increase and this has the ability to belittle the agreement by OPEC.
A third concern regarding the effectiveness of the said cut is that OPEC members are currently doing all they can to ramp up production before 2017, when the agreement kicks off. Saudi Arabia and Kuwait are expected to agree this month to resume oil production, with a potential of 300,000 barrels in daily output, from jointly operated oilfields which were shut down between 2014 and 2015 for environmental and technical difficulties.
That number added to excess from Russia and the US may mean that the 1.2milion bpd production cut may not result in actual reduction of oil output. Simply put, it may not be enough to tackle the glut and rouse the oil prices