Experts are cautiously optimistic that the Organisation of Petroleum Exporting Countries can finalise another production output deal as the relentless advance of US shale puts further downward pressure on prices.
Oil prices dropped again on Tuesday, extending a two-and-a-half week decline to over 8 per cent. Brent crude was fetching $US51.50 a barrel while West Texas Intermediate was trading at $US48.77 a barrel.
Analysts are optimistic another OPEC production cut agreement will eventuate. Photo: Warren Hackshall
The OPEC pledge, which was enacted in January 2017, is set to expire at the end of June, and investors are warily watching surging shale activity in the United States.
“Another six months would definitely give OPEC a chance to hold on,” says Nik Burns, commodity analyst at UBS. “They are still waiting to see the global oil inventory draw down from the last agreement.
“But the US uptick is certainly keeping people nervous that US oil output will continue to rise which will offset those production cuts.”
The country’s oil-rig count has more than doubled in the last twelve months, according to Friday’s Baker Hughes report, as oil companies pour billions of dollars into American projects in the Permian and Eagle Ford basins in Texas.
This, topped off with Libya’s oilfields returning to production last Thursday, has seen Brent crude has give back about half of its gains since OPEC and Russia’s historic agreement to curb Brent crude output last November.
This surge in activity has the Organisation of Petroleum Exporting Countries scrambling to piece together another agreement to curb output and stabilise prices.
Production cut: Round 2
Last week, Saudi Arabia’s oil minister said a number of major crude-producing nations reached an initial agreement to extend output cuts, as a surge in stockpiles continues to weigh on prices.
Starting in January, OPEC nations pledged to reduce output for six months, but have ultimately failed to achieve the target.
“Although there is a high level of commitment, we haven’t reached our goal, which is to reach the five-year average,” Khalid Al-Falih, Saudi Arabia’s oil minister said at a conference in Abu Dhabi.
“There is an initial agreement that we might be obligated to extend to get to our target.”
While there are heightened geopolitical tensions in the region, especially the tenuous relationship between Saudi Arabia – the defacto head of OPEC – and Iran, analysts are optimistic the cartel can produce another agreement.
“It certainly sounds like most of the oil producing nations are committed to supporting prices,” says Mr Burns. “Especially as there’s this steady uptick in oil rig counts in the United States.
However some analysts say there are a lot of details to be ironed out before another six month curb on production is initiated.
“While it is not probable that Iran, Libya, or Nigeria will be asked to cut their production, there probably will be differing views on the timeframe to extend the cuts,” said Greg Priddy, director of global energy and natural resources at Eurasia Group.
“As long as the Saudis are shouldering a disproportionate amount of the reduction, most of the other members will be eager to extend it for the full six months.
“But the Saudis will probably want to keep their options open and have strongly hinted that a shorter extension is under consideration, which is where Eurasia Group expects them to end up,” he said.
Additionally, there are question marks over Russia’s continued participation in the agreement. Russia’s oil minister has insisted the country has ful the full 300,000 barrels per day it pledged to but OPEC has been wary of the data.
“There will not be a high level of trust in the country’s continued compliance in the second half,” says Mr Priddy.
“In the end, there will probably be an agreement, but it will be a decision led by Saudi Arabia and other Gulf Cooperation Council members.”