By Harsh Vardhan Singh
The global market for oil faces a supply-side problem as volatility in oil prices have pushed the value of oil to as low as $30 per barrel. OPEC is trying to rebalance the situation through a production cut. It had hoped that a nine-month extension of its original six-month production cut to 2 million barrels per day(bpd) would be enough to rebalance the market. But, after this failed to work, the OPEC and non-OPEC members meet in Vienna and agreed to extend the production cut until the end of 2018.
Can the oil production cut work?
It is claimed that the production cut has started to work, as the oil price touches $70 per barrel. But then the question arises: what happens after the OPEC deal expires? Will the oil market rebalance to where it was before 2014? Will the OPEC and non-OPEC oil producing countries immediately go back to producing oil at maximum output? If that happens then the cut will have had no impact.
To understand this tradeoff it is necessary to look back to November 2016 when oil production was at its maximum of $82.29 million bbl/day. After the OPEC production cut was implemented, the latest data available has world oil production down to 81.00 million bpd/day in September 2017. The cut in production has succeeded in bringing oil prices back up to $70 per barrel.
In contrast with OPEC, America is increasing its shale production and profits by the day. The IEAs latest oil market report shows a blurred picture on prices, but it also shows that the growth in shale will be ‘explosive’ this year. The IEA revised its forecasted growth for US production from 870,000 bpd to 1.1 million bpd in 2018. OPEC also revised up its forecast for oil production to 1.15 million bpd. The revision of shale production numbers indicates that cuts in production are helping to increase oil prices but they are also encouraging shale producers to increase their output.
Demand will also be one of the major factors dictating oil prices this year. The demand for oil looks strong however the figures vary depending on the forecast. According to OPEC demand will grow to 1.5 million bpd, while the IEA expects growth to reach only 1.3 million barrels per day this year.
What happens when the cut in production ends?
So, after the OPEC deal ends in 2018 how will its members exit the deal? According to Neil Atkinson, head of the IEAs oil markets and industry division, If they wish to achieve the reduction of oil stocks down to the five-year average, theyre going to have to dig in for the long haul, which suggests that there is no exit plan. If the OPEC and non-OPEC countries again start to produce oil at a high level then this will again adversely affect oil prices.
On January 11, 2018, UAEs energy minister Suhail al Mazrouei said, I have no doubt that the market needs further correction. We still have more a than 100 million barrels that need to be taken care of. Although he cautioned that prices could go lower in short term. However, the hope remains that 2018 will be the year the oil market rebalances itself.”
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