OPEC, non-members agree to extend production cuts by 9-months

OPEC, non-members agree to extend production cuts by 9-months

May 25, 2017
4 min read
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OPEC countries and non-members agreed in a Vienna meeting agreed to extend oil output cuts for nine months through March 2018 in efforts to support prices and counter the effects of rising U.S. shale production.

The countries in the pact, led by Saudi Minister of Energy Khalid Al-Falih, agreed to extend cuts by the same amount that has been taken off the market for six months since January – 1.8 million barrels per day.  

"We considered various scenarios, from six to nine to 12 months, and we even considered options for a higher cut. But all indications discovered that a nine-month extension is the optimum," Al-Falih said.

The original deal was reached in December in which OPEC and 11 non-member countries, including Russia, agreed to cut output equivalent to 2 per cent of global production from October 2016 baseline.

The cuts came in response to oil price plunging below $30 early 2016 from its 2014 peak of near $110 per barrel, forcing countries heavily reliant on oil revenues, like Saudi Arabia and Russia to burn through their foreign reserves to plug budget holes and drastically tighten government spending.

The supply reductions were initially intended to last six months from January, with an option to extend for another six-months but the slower-than-expected decline in surplus fuel inventories prompted the group to consider a longer extension.

Oil price convincingly broke away from its $50 resistance and crossed $56 for the first time in two years as OPEC and non-members signed the deal in December. Expectedly, this also triggered growth in U.S. shale industry, which is not participating in the output deal, thus slowing the market's rebalancing with global crude stocks still near record highs.

Data from the U.S. Energy Information Administration indicate that maintaining the curbs into the first quarter of 2018 would bring stockpiles back in line with the five-year average -- OPEC’s stated goal.

Ann-Louise Hittle, Wood Mackenzie's  Vice President, Research Macro Oils, said: "The extension through to the first quarter of 2018 makes it clear to the oil market that OPEC intends to continue to support oil prices at the expense of market share, at least for the time being. Firmer oil price will, we expect, further support the US tight oil industry into 2018."

Libya and Nigeria were once again exempt from the output cuts as their output remains hindered by political unrest.

"We have seen a substantial drawdown in inventories that will be accelerated," Al Falih said. "Then, the fourth quarter will get us to where we want."

He said that participating non-OPEC producing countries had shown a high level of conformity—with reductions exceeding 100 percent of the target in first four months of the agreement.

“The main focus remains on consolidating, strengthening and accelerating the process of rebalancing, alongside the important task of drawing down global oil inventories,” Al Falih said.

Iraq, OPEC’s second-largest producer, which only reluctantly agreed last year to a six-month output cut, had previously favoured prolonging the historic supply cuts by just another six months.

Al-Falih secured the backing of his neighbour for longer curbs after talks in Baghdad ahead of the Vienna meeting with his Iraqi counterpart Jabbar Al-Luaibi.

The country has the worst record of compliance with its pledged cuts, pumping about 80,000 more barrels of oil a day than permitted during the first quarter. The nation will have even less incentive to comply now because capacity at key southern fields is expanding and three years of fighting Islamic State has left it drowning in debt.

Meanwhile, Equatorial Guinea joined the Organization as a member country. The African nation will be one of the group’s smallest producers, pumping about 270,000 barrels a day, a little more than neighboring Gabon.