Oil output cut set to soak excess by next year

The production cut deal was the first Opec reduction since 2008 and a reversal of a two-year policy pinned on protecting market share rather than shoring up prices.

Above, an oil facility in eastern Saudi Arabia. Courtesy Saudi Aramco

RIYADH // Saudi Arabia expects oil inventories to drop by the first quarter of 2018 following the extension of production cuts and the addition of some smaller producers to the deal.

Opec kingpin Saudi Arabia and Russia voiced their agreement earlier this month to extend the oil output deal by nine months to help soak up excess supply in the market. Despite the agreement, oil prices have lingered below US$55 a barrel.

“We believe that the continuation with the same level of cuts plus potentially adding one or two small producers who wish to join will be more than adequate to bring the five-year balances to where they need to be by the end of the first quarter of 2018,” Khalid Al Falih, the Saudi oil minister, said in Riyadhn yesterday.

Inventories in 35 of the world’s most industrialised nations – the Organisation for Economic Cooperation and Development – were just above 3 billion barrels in April, or about 307 million above their five-year average, data from the US Energy Information Administration shows.

“As long as Opec also reduces exports along with production, inventories will draw. They already are,” said Amrita Sen, the senior oil market analyst at Energy Aspects consultants.

But surging US production, which next year is expected to reach the highest level since 1970, is rattling Opec, which meets on May 25 in Vienna to agree on policy.

Opec and the Russia-led group of countries last year reached an agreement to remove about 1.8 million barrels per day (bpd) from the market in the first half of this year, leading initially to an oil price spike. The deal was the first Opec had made since 2008 and a reversal of a two-year policy pinned on protecting market share rather than shoring up prices. It was also the first time for Russia to join a global oil output cut.

“Everybody I talked to is enthusiastic about joining” the oil output extension deal, Mr Al Falih said.

Opec initially agreed to trim its production by 1.2 million bpd and was later joined by 11 non-members, led by Russia, to cull about 600,000 bpd from the oil market.

“Stronger demand into 2018 and 2019 would surely help clear the global glut,” Bank of America Merrill Lynch said in a research note yesterday. “So maintaining the current discipline of production cuts is key and we expect the current quotas to hold for the most part.”

In the last deal, Nigeria and Libya were exempt from the Opec cut because conflicts have disrupted their oil production. Iran was also allowed to raise output because sanctions had crippled its supply.

This time round, Iran won’t be exempt, Mr Al Falih said. “They [the Iranians] will be treated like everybody else,” said the oil minister.

“I don’t accept that Saudi Arabia or any other countries should pick up the slack from others,” he said. “We did go the extra mile initially to set an example and be a role model, and I think our colleagues appreciated that and responded positively.”

One big headache for Opec is US shale oil production, in particular, which is benefiting from the Opec cuts and returning to the market in force.

“We welcome shale, we want it to be back, we want it to be at a moderate healthy level,” Mr Al Falih said.

“Our interest is stable, healthy, balanced supply and demand on a global level, and for us to achieve that, we need stability for US shale.”

US domestic oil output is set to rise to 9.53 million bpd by next year, the Energy Information Administration (EIA) said in February. “Shale continues to grow and will do so. Opec are aware of that,” said Ms Sen.

“Supplies outside of North America are falling. But the key is if Opec can get the curve backward, shale hedging will slow down and that’s very important.”

The IEA, a Paris-based energy watchdog for consumer countries, warned this month that even with better oil demand and continued supply restraint, absorbing the enormous glut of oil will be slow going this year.

It expects oil demand to grow by 1.3 million bpd, to 97.9 million bpd, over the whole year, despite lower-than-expected demand so far this year.

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