Editor’s Comment: Common sense prevails
OPEC’s decision, with the support of Russia, to moderately increase production was pragmatic
So, the “will they, won’t they?” speculation buzzing around global oil production quotas, was finally resolved in a conference room in Vienna last month, as the headquarters of the Organisation of the Petroleum Exporting Countries (OPEC) played host to many of the movers and shakers of the oil and gas industry at its 174th OPEC meeting.
Oil production will indeed be increased – a bit. The last 18 months have seen stringent output cuts by a group of 24 OPEC and non-OPEC countries, which, in May, reached 152% adherence, such has been the determined resolve of the cartel. This meant the target of reining in production by 1.8mn barrels per day (bpd) was actually surpassed by around an extra 900,000 bpd.
The long-term goal has been to whittle down US oil inventories close to their five-year averages and insulate the oil price as America’s own production has accelerated. The strategy has pretty much worked. A week before the Vienna get-together, the US based Energy Information Administration, in its weekly report, revealed that US inventories had effectively fallen by more than 80mn barrels in the space of 12 months.
The economic crisis in Venezuela, not something factored into the group’s calculations, has exacerbated the cutbacks as production in the South American country has plummeted by almost 1mn bpd in barely 18 months. This is where most of the additional supply restraints have been found.
But while there was solidarity as the cuts were administered, the decision to raise production was a far from unified one. Journalists in Vienna scurried from one stairwell to another to hear conflicting views on the prospect of an output boost from leading lights such as Khalid Al Falih and Bijan Zanganeh, the respective Saudi Arabian and Iranian oil chiefs.
As Venezuela sees its oil production and revenues shrinking and Iran stares down the barrel at US sanctions, there was little incentive for these nations to acquiesce in a drive to spike production and see oil prices cool down again. For the likes of Saudi Arabia and Russia, with spare output capacity, a chance to wind open the taps is attractive.
In the end, the general consensus reached makes a lot of sense. In effect, the group of 24 countries will now pull back to 100% adherence to the cutbacks and consequently around 1mn extra bpd could reach the market. This should be enough to maintain oil prices slightly above $70 a barrel, a level most OPEC members are happy with, while hopefully reducing the chances of increased inflationary pressures if the cost of crude had continued its upward trajectory unchecked.
But will this production increase make any difference to US gasoline prices? President Trump, vociferous in his criticism of OPEC’s recent tactics, will certainly hope so, as November midterms loom.