Will A 9-Month Crude Production Cut Extension Be Enough?

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

Oil prices surged on Monday after Russia and Saudi Arabia said they support an extension of the OPEC/non-OPEC production cuts. Oil prices have clawed back a lot of the losses exhibited over the past month, with Brent now safely in the low-$50s and WTI on its way toward those levels.

The joint announcement from Saudi Arabia and Russia, the two most important negotiators, effectively extends the cuts, although the official move won’t come until the May 25 meeting. While it is possible that other OPEC or non-OPEC members might balk at the move, it remains highly unlikely given that most are anxious for higher oil prices. And in any event, Saudi Arabia has always been the one to take on the lion’s share of the burden.

The extension was widely anticipated and the announcement merely squashed some of the uncertainty ahead of the Vienna meeting later this month.

However, what really took the markets by surprise on Monday was the support for a nine-month extension rather than just an extension through the end of the year. “The agreement needs to be extended, as we will not reach the desired inventory level by end of June,” Saudi energy minister Khalid al-Falih said in a statement. “Therefore we came to the conclusion that ending will probably be better by the end of first quarter 2018.”

And in an effort to bolster the production cuts, the OPEC/non-OPEC coalition is working on bringing new countries into the fold, including Egypt and Turkmenistan, although it is unclear if they will be successful. To be sure, some contributions from Egypt and Turkmenistan – with a combined total output of 700,000 bpd – would not significantly alter the pace of adjustment, but their participation would add a psychological jolt to the market.

"I think OPEC and Russia recognize that in order to get the market back on their side they will need 'shock and awe' tactics where they need to go above and beyond a simple extension of the deal," Virendra Chauhan, Singapore-based analyst at Energy Aspects, said in a Reuters interview.

Although the markets were generally ebullient, questions remain. Let’s assume that everyone is on board and continues to rather impressive level of compliance. The reason for the nine-month extension is that the cuts are bringing inventories down at a much slower rate than originally anticipated. Bloomberg Gadfly notes that even extending the cuts through December would only bring inventories down by just 722,000 bpd for a total reduction of about 120 million barrels. That is less than half of the 276 million barrel surplus that existed just in OECD countries at the end of the first quarter.

Much of the reason for that is higher U.S. shale production – which is coming back much quicker than expected. Last week OPEC itself revised its estimate for U.S. shale production in 2017. OPEC now expects the U.S. and other non-OPEC countries to add 950,000 bpd this year, an upward revision of 64 percent compared to the previous month’s projection. It is hard to overstate how shell-shocked the group has been by the swift return of oil supply in the U.S. As recently as January, OPEC only expected the U.S. and other non-OPEC countries to add around 100,000 bpd this year. Four months later, after strong gains from the Texas shale patch, it revised that figure up to 950,000 bpd. No wonder it now sees an extension of its cuts as necessary.

Perhaps nine months will do the trick. But one problem is that keeping everybody in compliance with the cuts will grow more difficult over time. Russia typically ramps up production in summer months as operations can resume following cold winters. “[W]e are skeptical about Russia's willingness to actively participate in any extended cuts,” Carsten Fritsch, an analysts at Commerzbank, told Reuters.

Also, Iraqi officials have suggested that they will be able to ramp up their production capacity to 5 million barrels per day later this year as new fields come online. Then there are the exempt countries – namely, Libya and Nigeria – that have no barriers in their way (aside from serious domestic troubles) to ratcheting up output this year. So, while extending the OPEC/non-OPEC cuts for nine months is a welcome development, some are wondering whether the cuts need to also be deeper.

But that isn’t in the cards for now. Saudi Arabia and Russia are betting that an extension through the first quarter of 2018 will do enough to chip away at inventories, providing a floor beneath prices, but not boosting them so much that U.S. shale comes back even quicker than it already is. It’s a difficult needle to thread, but that is arguably OPEC’s least bad option.

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scoutshonor's picture

Will it be enough?



Luc X. Ifer's picture

Agree. Truth is ppl buy less gas and gas based personal cars, and that's very good.

espirit's picture


Price goes up an we be jackin’ you for a tankful.


knukles's picture


Say, I got an idea!  Maybe we can run a gallon through the City, rehypothicate it infinitely and drive the physical price down with paper oil.
What an idea!

In any case, the Communist Cabal of California says that the reason for gas prices going down are electirc cars.
And the reason that the roads are so shitty is that with nobody buying gas, the gas tax isn't enough to fix shit. 
They never have enough to fix shit.



Same as the Reptilians.  Never enough souls to eat.

Luc X. Ifer's picture

Not going to happen. Technologies survive ability is linked to the market needs for them, markets are linked to demographics and the demographic for personal transportation needs has changed drastically the last generation, millennials either don't buy anymore in the gas car scam or they buy electric cars. Gas car is a dinosaur and will go the extinction way as such in less than a generation, and that's awesome.

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slimycorporatedickhead's picture

Free market capitalism at its finest

Turin Turambar's picture

Cuts?  I do not think that word means what they think it means.  LOL  OPEC has learned well from the Fed jawboning over the years.  It's not what you do that matters.  It's what you say you are going to do.  :-O

knukles's picture

Don't listen to the music; watch how they dance.

Suleyman's picture

>   LOL  OPEC has learned well from the Fed jawboning over the years.


Some sheik actually said it: We don't necessarily have to implement the reductions, it is enough to say it and prices go up!



FreeShitter's picture

Fuck no....we need moar bullshit DOE and ADP reports as well.

south40_dreams's picture

OPEC production cuts are as real as global warming

knukles's picture

Say.......   Now I'm confused.  
Could you run that by me again?

shovelhead's picture

I just got a picture of a bear and a camel shaking hands with their fingers crossed behind their backs.

coast1's picture

I never pay attention to these stupid, "OPEC does this, "opec does that"   its all a waste of time...I am only here to read comments and make one myself...Back in June 2016, I made a comment that oil will stay at 50 dollars a barrel, give and take a few bucks...Why?  it cant go below $40, and they cant get it above $55....You should know the reasons why...under $40 would cause havoc, and not enough consumption to go over 55....Almost every day, ZH has an article about OPEC, and anyone that read those articles, wasted their time...I never read any OPEC/Oil articles....it a waste of time...but ZH posts them almost every day...stop doing that ZH...thx

bankbob's picture

Fracking cost structure in the USA continues to push down, down, down.

And, Fracking operators can now add more new capacity faster than OPEC can re-activate shuttered wells.


jm's picture

I know the Saudis sell at spot.  Do Russian and other OPEC producers typically sell at spot or forward?

If so, they need backwardation to get pricing power over shale producers.

dunce's picture

Pipe lines are being completed and oil is moving efficiently to refineries at an increasing rate. OPEC will learn to live competion.