In the past year, the oil price was suffering due to oversupply in the market. In December 2016, OPEC proposed cutting down oil production to stabilize the oil price. The OPEC members have agreed to cut down the production to tackle the oil oversupply in the market. For the first time in months, oil prices reached beyond $50 per barrel. However, the market is not stable yet as the US Shale inventories continue to rise. The current OPEC pact is until June, but the OPEC is hoping to extend the deal further.
The oil producing countries are willing to agree to the cuts in production, but without the support of non-members like Russia and others, the efforts will be futile. For the first time in eight years, the OPEC countries have cut down production by 1.2 million barrels per day. Several non-OPEC producers such as Russia have also agreed to cut the production.
An immediate impact of the deal was positive for oil prices. However, the US companies wanted to take advantage of the higher returns and they started pumping more. The OPEC deal was drafted asking the members to reduce oil production for six months to prevent saturation of the market. However, the current scenario indicates that supply cut for six months is not sufficient. Oil producers should control production for a few more months to reduce the inventories.
An OPEC delegate commented that extension is necessary to restore balance to the market. The non-members should also agree to oil production cut to have any positive impact on the market. OPEC is planning to extend the production cut deal beyond July and if the stock level doesn’t reach the targeted level, deeper cuts may be recommended. OPEC plans on bringing down the oil stocks to an average level in the past five years. Currently, the world oil stocks remain 278 million barrels above this targeted level.
Market experts suggest that oil extension beyond six months is necessary, but the members and non-members must agree to production cuts. The ministers are scheduled to meet in May to analyze and understand the movement of the market. Russia is one of the top non-member oil producers that hasn’t publicly announced its compliance with the production cut deal. However, it is not happy with the increase in US Shale oil production.
While hard negotiations are unavoidable, it is still too early to determine whether the oil producers would agree to supply cuts. The OPEC leaders are certainly worried about the increased Shale oil production that contributed to oversupply in 2014. The increased production could result in inventory growth by 300,000 barrels per day, but it could still be accommodated by the market. Large producers such as Saudi Arabia have a greater impact on production levels. While they are not happy to lose the market to US Shale oil, they need the support from OPEC for a steady income. The OPEC members will most likely agree to the extension of supply cuts, but they would also want the OPEC to push the non-members to comply with the deal.