A market with an unambiguous message, that their work is far from done, is faced by OPEC and allies reviewing the impact of their oil cuts this weekend.
Talks will be overshadowed by the question of whether the persisting glut requires the curbs to be extended beyond the summer, as producers meet in Kuwait to gauge how well they’ve implemented output cuts agreed on last year. OPEC and its partners have little choice but to keep going, according to all 13 analysts surveyed by news agency Bloomberg, with U.S. crude stockpiles swelling to new records and prices sinking below $50 a barrel.
“The cost of a change of course for producers is simply too high,” said Bill Farren-Price, chief executive officer of consultants Petroleum Policy Intelligence. “They are committed to this course for now, and they will look for stocks to draw in the second half.”
Following the decision by the Organization of Petroleum Exporting Countries and 11 allies to curtail output, oil jumped 20 percent in the weeks to end a three-year surplus. Prices have since slipped on concern the curbs aren’t clearing the oversupply quickly enough, even though OPEC has delivered almost all the promised cuts. Additionally, to fill any shortfalls, the U.S. shale producers are gearing up.
According to data from the International Energy Agency, while Russia and other allies delivered about 44 percent, OPEC achieved 91 percent of its pledged cuts last month.
To decide whether to extend the deal, OPEC ministers will then meet May 25 in Vienna. They’ll prolong the cuts to the end of the year, predicted analysts at banks including Bank of America Corp., Commerzbank AG and Citigroup Inc.
The kingdom has grown more willing to extend the curbs, indicated Saudi Arabia Energy Minister Khalid Al-Falih in a TV interview on March 17, while insisting it’s too early to say what will be decided. Shifting from his previous position that six months of cuts would be enough, he said that the deal will be maintained if oil stockpiles are still above their five-year average.
According to consultants FGE, achieving the goal of bringing inventories down to normal levels by mid-year is “impossible.” Data from the IEA indicate that if they cut for just six months, OPEC and its partners would deplete less than one-third of the 300 million-barrel surplus.
According to DNB Bank ASA oil analyst Torbjorn Kjus, OPEC won’t know by late May if its objective has been fulfilled because of the time lag in the release of global inventory data. “May 25 could be comparable to maybe 30 meters into the 100-meter sprint at the Olympics.”
According to Goldman Sachs Group Inc., OPEC has an incentive to wrap up its intervention sooner rather than later by the danger of simulating growth in rival U.S. shale-oil supplies.
The bank said that the “unintended consequences” of a revival in drilling and of keeping credit flowing to shale have already been delivered by the cuts. According to Baker Hughes Inc., the number of rigs in operation has almost doubled since May.
“It is not in OPEC’s interest to extend its cuts beyond six months as its goal is to normalize inventories, not support prices,” Jeff Currie, Goldman’s head of commodities research, said in a March 14 report.
(Adapted from Bloomberg)