OPEC Extends Oil Production Cuts: Would It "Do The Trick"?
ORBEX | May 29, 2017 05:40AM ET
Summary:
- The 13 country OPEC members met in Vienna on May 25th, 2017
- The 13 OPEC member nations including 10 non-OPEC countries agreed to extend production cuts to March 2018
- The production cuts agreed upon at the November 2016 OPEC meeting will continue
- Libya, Iran, and Nigeria continue to be exempted from adhering to the production cuts
- Speculation rife that Saudi Arabia needs higher oil prices next year, coinciding with the Saudi Aramco IPO
- Markets not very impressed as oil futures fell over 5% following the OPEC decision
Crude oil prices fell over 5% on Thursday as OPEC leaders agreed to extend the production cuts at the meeting in Vienna on May 25th.
The markets were slightly disappointed as the production cuts were expected to be higher than what was announced.
The plunge in oil prices on Thursday was the biggest one day drop in nearly three weeks. The announcement to cut production was well communicated ahead of time.
The oil ministers from the 13-member OPEC organization decided to extend the production cuts that was implemented in January this year, after reaching an agreement at the previous OPEC meeting in November last year.
The production cut was estimated to cut about 2% of the global oil production from the markets.
With the same deal being extended, the markets were slightly disappointed as the U.S. shale oil producers were seen quickly ramping up production.
Joining the OPEC member nations were 10 other non-OPEC member countries including Russia, the largest non-OPEC oil producer. Production is expected to be maintained at 1.8 million barrels per day.
The Saudi energy minister, Khalid al-Falih expressed optimism that the deal that was reached last year was working noting that keeping production levels would "do the trick" in pushing oil prices higher. The new deal will start on July 1st.
Nigeria and Libya were once again exempted from the production ceilings because of the ongoing political unrest. Meanwhile, Iran was also allowed an extension and can produce up to 3.97 million barrels per day as initially agreed upon last year. Timing the oil price for Saudi Aramco's IPO?
Saudi Arabia made its intentions clear on expecting higher oil prices as it is expected to launch the IPO for the Saudi Arabian Oil company in 2018.
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Saudi Aramco is expected to offer 5% of the oil company which is being called the biggest IPO ever. By some estimates, the initial valuations stand at nearly $2 trillion. The valuation is, of course, subject to change depending on how oil prices trade by next year.
Officials from Saudi Arabia have made it clear that they would like to see oil prices above $60 a barrel, however, some estimates put this at around $80 a barrel.
Despite efforts by the OPEC nations to push oil prices higher which led to a surprising 96% compliance rate among the oil producing nations, the U.S. shale oil producers have made it difficult, however. The massive oversupply in the oil market is expected to remain in place with a lot more expected on the part of the OPEC countries.
This was partly the reason why oil prices fell on the news knowing that OPEC members will not be curbing production any more than they did in November. Despite falling steeply on Thursday, Crude oil futures were seen posting a modest recovery on Friday.
Crude oil futures for July delivery was seen rising from a 9-day low at $48.18 a barrel.
There is also a further lack of clarity on what would happen beyond March 2018, with the major narrative being that the OPEC nations could once again go back to reclaiming the market share.
The most immediate test for the oil markets will come only the third quarter of the year when seasonal demand for oil could potentially push oil prices higher amid the slower pace of production.
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