OPEC oil producers want to extend the June deadline on OPEC oil supply cuts to balance the market. Sources within the group announced to Reuters today. The extension will not apply to non-members like Russia. They must adhere to the initial agreement.
The group wants oil supplies to drop to the five year average. As of January, crude inventories was at nearly 280 million barrels above this level.
The turnaround occurred in part due to Saudi Arabia’s displeasure with the return of shale oil production.
“OPEC heavyweights such as Saudi Arabia are not happy with the return of shale oil in full force and have to make a hard choice between losing part of their market share or steady income,” said a source from a major non-Gulf OPEC producer.
“They will more likely opt for income and will push to get help from non-OPEC.”
As we reported previously, OPEC member Saudi Arabia landed itself in an untenable situation. OPEC oil supply cuts forced OPEC member Saudi Arabia to assist its rival oil producers. Plus, reducing supply did not increase oil prices.
In fact, crude oil prices went back to levels last seen at the end of last November. Unfortunately for OPEC member Saudi Arabia oil stockpiles resisted change; the number remains about the same globally. But the U.S. has a surplus greater than 20 percent of a five-year average level. Europe offset its barrel reduction with gasoline increases.
China increased its crude oil stockpiles by about 30 million barrels in February. OPEC member Saudi Arabia oil minister Kahlid Al-Falih acknowledged that global oil stockpiles declined slower than OPEC foresaw. Al-Falih believes an extension in reduction of cuts is necessary. According to Bloomberg: However, he also warned that fellow OPEC members couldn’t count on the kingdom to continue shouldering a disproportionate share of the burden.
As reported late last year, eleven countries, including Azerbaijan, Russia, Mexico, and Oman, reached a deal to reduce oil outputs, the BBC reports. The meeting of OPEC to finalize the deal was held in Vienna. In late November, Mohammed Bin Saleh Al-Sada, (Organization of the Petroleum Exporting Countries) OPEC’s president said the group will reduce output by 1.2 million barrels of oil a day starting January 2017.
The announcement arrives after over two years of low oil prices – half of its 2014 price – due to the abundance of oil in the market. Also, two years of disagreements between the oil producers threw the deal into doubt. Nevertheless, the member countries had a change of heart. Some people remain skeptical regarding whether OPEC — and non-OPEC countries — can comply with the agreements. There are benefits for all.
OPEC Oil Supply Cuts Continue
Still, compliance remains an issue. If countries do not uphold their end of the bargain, then the deal faces shaky ground in the future. Gary Ross of Pira Energy noticed an interesting trend over the years. At that time, member countries will report the progress of the cuts. Liquified natural gas (LNG) prices rose significantly due to the OPEC and non-OPEC deals.
OPEC oil supply cuts and chilly temperatures in Asia and Europe increased LNG demand. People use LNG to heat their homes. LNG prices will stay higher as long as these conditions persist.