Riyadh and the house of Saud have stated their intentions to reduce oil to the United States. This action is being taken in order to reduce oil inventories in the US. According to Saudi Oil Minister Khalid Al-Falih, the near record stockpiles of oil which have accumulated in the United States are preventing a rise in global oil prices.
Oil prices fell during Thursday’s market session. The drop coincided with OPEC’s meeting in Vienna, where the announcement was made that production cuts would be extended at current levels for an additional nine months. Market analysts speculate this drop was caused by the market opinion the extension of the cuts at their current level might not have the desired effect of sufficiently reducing global oil stocks.
In a meeting at the OPEC headquarters in Vienna Austria on Thursday, OPEC decided to extend production at their current rate of 1.2 million bpd for an additional 9 months. OPEC will almost certainly be joined in these production cuts by a dozen other non-OPEC oil producing nations. The group of non-OPEC reducing nations is led by Russia, which will continue its production cut that began in December when the previous round of OPEC cuts which began. The non-OPEC share of the production cuts is expected to be around 600,000 bpd.
Much has been made in the energy markets lately of the intentions of OPEC, whether the extension of the production cuts will have the desired effect upon oil stocks, and the markets reaction. What hasn’t been discussed however, is that if the production cuts were effective one man could decide to restore oil stock to record highs almost instantaneously. That man is of course, the most powerful man in the world.
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The projected continuing surge in oil production from producers unencumbered by the OPEC led production cuts is not the extent of the challenges facing the efforts to bring about a consistent rise in oil prices. Their own report forecasts a drop in the need for OPECs crude this year by 300,000 bpd. Assuming that forecast, which may be overly optimistic, proves accurate the demand for the cartels oil will be 31.92 million bpd, at that level inventories will remain largely unchanged.
Strong words need to be followed by strong actions otherwise they simply discredit the speaker in the future. Khalid al-Falih the Saudi Energy minster, and Alexander Novak his Russian counterpart, pledged in Beijing to do “Whatever it takes” to reduce the global glut in oil products inventory. However, unfortunately for Russia and OPEC, at this point changing the direction of the oil markets will require more than just a catchy headline.
Almost everyone is happy when oil prices fall and consumers save money at the pump. However, there is a difficulty with oil prices falling too far too fast which is almost never brought up. Everything that has a beginning has an end, and this includes the oil industry. There will come a day when the world’s oil demand will peak and the oil industry will begin its slow decline into history. When this day will come is still the subject of much debate; but whether in 20 years or 80, it is coming. When that day environmentalists anticipate so eagerly does come to pass what will remain? Among other things, the infrastructure which once moved oil across the globe.
This is the second part of a three part series discussing the recent past and future of oil prices and the reasons why prices are where they are. Many intelligent people who make their living analyzing oil markets have pointed to OPEC and its ability to enact large scale production cuts as central controlling oil prices. While this has yet to occur as the production cuts enter their fifth month true believers continue to chant the mantra “just give it time”.
This is the first of a three part series discussing the recent past and future of oil prices and the reasons why prices are where they are. April was an interesting time for the crude oil market. From late March until the latter half of April oil prices were above $50 a barrel and oil bulls became excited by the idea that a supply cut led by OPEC and Saudi Arabia would soon tighten balances and lead to increased prices. This has not come to pass and here is why I am doubtful that change in the near future.
