OPEC struggles as US steps up oil production

As per the OPEC deal, Saudi Arabia, the world’s largest crude exporter and OPEC’s biggest producer and the de facto leader had to cut output by 4,86,000 barrels per day (bpd) to a ceiling of 1,00,58,000 bpd.

Saudi Arabia is still struggling to regain its lost market share — particularly after the OPEC deal — not only to its biggest rival, US, where US shale oil production is on a rise, but also to Iran and Iraq. While Iran was allowed to raise its output, Iraq failed to comply with the cuts as promised.

As per the OPEC deal, Saudi Arabia, the world’s largest crude exporter and OPEC’s biggest producer and the de facto leader had to cut output by 4,86,000 barrels per day (bpd) to a ceiling of 1,00,58,000 bpd. Iraq, on the other hand, promised a production cut of 2,10,000 bpd to a level of 43,51,000 bpd. However, Iran was to raise its output by 90,000 bpd to 37,97,000 bpd.

Saudi Arabia — locked, as it is, in an intense oil battle with the US — is struggling to arrest the fall of oil prices. In the last couple of months, prices have remained in the range of $47 and $54 a barrel, due to consistent pressure from US shale oil production. Moreover, production cuts have also failed to reduce global inventories, significantly, even after four months of the deal.

Now all eyes are on the May 25 meeting of OPEC and allied crude producers, where an extension of oil production cuts is expected to be announced. Though so far, both OPEC and non-OPEC countries have given positive signals in this regard, it remains to be seen if this would rein in the fall in oil prices.

In the meanwhile, global oil prices may continue to rebound during shorter intervals to reflect oil inventory declines. However, the pressure on oil prices is likely to persist given that the UN’s ‘World Economic Situation Prospects’ report expects the Chinese economy — known for its oil guzzling potential — to grow at a moderate rate. Adding to the pressure will be India’s decision to cut oil imports from Iran by 25 per cent as well as the unceasing shale oil production from the US.

Given these dynamics, crude oil prices are expected to hover in the range of $50 to $55 a barrel in 2017, delaying oil rebalancing yet again.

Until the OPEC deal, Saudi Arabia’s ability as ‘swing producer’ was intermittently questioned. But this deal, which helped oil prices to rise as a result of planned production cuts, restored its role as swing producer, as it shouldered almost 60 per cent of the output cuts so far.

However, US President Trump’s decision to strive for energy independence and global dominance through oil exports has strained Saudi Arabia’s plan to rebalance the markets. To meet his objective, Trump has aggressively pushed ahead with fracking plans and has loosened drilling regulations. These factors alone could go a long way in helping US increase its oil production.

These plans along with a delay in the drawdown of inventories pose a significant challenge not only to Saudi Arabia’s efforts to curb oil production, but will also possibly impact the valuation of Saudi Aramco IPO as it needs higher oil prices for a better valuation.

With OPEC seemingly running out of options, the US stand to gain in this battle of grabbing the oil market share to become a significant player in the global oil market.

This commentary originally appeared in DNA.

The views expressed above belong to the author(s).

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