The Fuse

OPEC Wastes No Time in Cutting Production

by Matt Piotrowski | January 23, 2017

The coordinated production cuts among OPEC and some non-OPEC nations have officially begun, and according to ministers, compliance has so far been higher than originally anticipated, a factor leading to more volatility and unpredictability in global oil prices and for U.S. consumers. At the OPEC/non-OPEC monitoring committee meeting this past weekend in Vienna, officials touted their success, saying that so far some 1.5 million barrels per day (mbd) have been taken off the market, in an effort to manipulate fundamentals and boost oil prices.

“The deal is a success …All the countries are sticking to the deal …(the) results are above expectations,” Russian Energy Minister Alexander Novak said after the meeting. Saudi Energy Minister Khalid al-Falih said that implementation had been so far been “fantastic” and he seeks 100 percent compliance by next month. The overall agreement, whose details were finalized in November-December, called for 1.8 mbd, roughly 2 percent of global supply, to be cut among OPEC and non-OPEC participants. The group has been adamant about putting together a united front to show that it will follow through with production cuts and counter critics who doubt its willingness or capability to do so.

OPEC taking volumes off the market has also completely changed the market’s sentiment. Hedge funds and other speculators are betting on higher prices in droves.

The output cut has underpinned prices above $50 per barrel, more than double where they were in early 2016, and promises to bring down crude and refined products inventories, which are an important cushion against unexpected geopolitical supply outages and surges in demand. OPEC taking volumes off the market has also completely changed the market’s sentiment. Hedge funds and other speculators are betting on higher prices in droves, with bullish trades near record-high levels. Some analysts, including the International Energy Agency (IEA), see the fundamentals shifting into a deficit this year, particularly since OPEC members, along with its non-OPEC partners, are indeed following through with their pledges to rein in output.

It’s unclear how the Trump administration will react to OPEC’s market manipulation. The new president has made promises to cut dependence on the cartel’s oil through nixing regulations and opening up federal lands to drilling. The White House website says that the U.S. is “committed to achieving energy independence from the OPEC cartel and any nations hostile to our interests.” Congress, meanwhile, has already taken steps to combat OPEC with the introduction in the House of a bill to look at the cartel’s actions and their economic and national security impact. Four lawmakers, led by Kevin Cramer (R-ND), have introduced legislation to establish a one-year commission to assess how OPEC and other national oil companies contribute to an unfree global oil market.

With a deep production cut, the burden will be on U.S. consumers, who rely on petroleum for 92 percent of the energy used by the transportation sector.

The committee’s focus would in particular examine how OPEC’s policies have strained the U.S. economy. The first bill was initially introduced in early 2016, and since then, OPEC has switched its strategy, from driving down prices in an effort to undermine U.S. shale production to restraining supply to boost prices. Given the fact that OPEC members and NOCs control 90 percent of the world’s proven crude oil reserves, they have an outsized influence over global oil markets. Click here to read the full text of H.R. 545. Throughout the price fall of 2014-16, OPEC pushed output to record levels to hold onto and increase market share, slicing nearly $1 trillion in global upstream investment in the meantime and undermining the burgeoning U.S. shale sector. But now with a deep production cut, the burden will be on U.S. consumers, who rely on petroleum for 92 percent of the energy used by the transportation sector. No matter the direction of prices, OPEC has created uncertain and volatile conditions with its rhetoric and actions.

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