Amid rising global inventories, Saudi Arabia last week intimated that the latest round of OPEC+ production cuts may extend into the second half of 2019. The decision comes as the United States, keen to tighten its sanctions on Iran, announced that U.S. production and OPEC’s spare capacity can handle a market with zero Iranian crude exports.
“My assessment is that the job still remains ahead of us… We are still seeing inventory builds.”
“My assessment is that the job still remains ahead of us… We are still seeing inventory builds… We need to stay the course certainly until June,” Saudi energy minister Khalid al-Falih told reporters at OPEC’s Joint Ministerial Monitoring Meeting in Baku, Azerbaijan.“We like to remain ready to continue monitoring supply and demand and do what we have to do in the second half,” he added.
OPEC and non-OPEC nations agreed to cut output by 1.2 million barrels per day (Mbd)—or 1.2 percent of global demand, and Saudi exports, according to al-Falih, would remain below 7 Mbd in March and April. Russia, which has been slow to implement its cuts, is approaching full compliance and is close to cutting 140,000 barrels per day (b/d). OPEC+ has decided to delay a decision on the future of their production cuts, amid disagreements among the group.
Yet as OPEC+, led by Saudi Arabia and Russia, seek to cut output, the United States is confident that OPEC’s spare production capacity can mitigate any fallout from its policy goal of stopping all Iranian oil exports. Excluding Venezuela and Iran, the International Energy Agency estimates OPEC has 2.8 Mbd of effective spare production capacity and U.S. officials believe this capacity, coupled with booming American production, can make up for the loss of Iranian barrels.
The threat of rising oil prices—and a subsequent jump in U.S. gasoline prices days before the Midterm elections—spurred the United States to temper its November oil export sanctions on Iran, by granting waivers to eight countries and allowing them to continue buying the nation’s crude. The waivers, which last for 180 days, are approaching their expiry date, and the White House has not shown interest in extending them.
For the United States, rising production can help it meet its foreign policy goals. In a speech at CERAWeek, Secretary of State Mike Pompeo told an audience of energy executives and oil ministers that U.S. shale oil and gas will “strengthen our hand in foreign policy.” He went on to state that the United States is “committed to bringing Iranian crude oil exports to zero as quickly as market conditions will permit,” adding, “We need to roll up our sleeves and compete—by facilitating investment, encouraging partners to buy from us, and by punishing bad actors.”
Yet, while rising domestic production has achieved enormous benefits for the U.S. economy, high production alone does not mean the administration has achieved its energy dominance goals. Energy security is also a function of consumption, alongside maximized domestic supply. For the United States to realize its foreign policy ambitions, domestic oil demand must be reduced.