Goldman Sachs analysts have warned that OPEC’s job is not over with the announcement of an extension to its November agreement. Now the group needs to convince markets that even with the cut, U.S. shale output growth can maintain the global glut, with a view to curbing capital inflows into shale production.
“OPEC needs to create a credible threat that the oil market may return into surplus to finally slow the capital inflows into shale. This could be achieved by both expressing the goal of growing future production, and gradually ramping up production to grow market share but keep stocks stable and backwardation in place.”
It’s difficult to say how the latter part of this advice can be accomplished, especially with global inventories still above the five-year average, which OPEC has set as a goal. What’s more, Asian refiners are saying, according to Bloomberg, that OPEC members are already seeing their regional market share diminish as a result of the initial cuts. The decline will most likely continue, and any sign of a ramp-up in production in any non-exempt OPEC member will sound an alarm, further pressuring prices.
Crude oil prices fell by around 5 percent after OPEC announced the cut yesterday at its Vienna meeting, as traders and investors were disappointed as hopes were dashed that OPEC would cut production more deeply, instead of just for longer.
Also, Libya and Nigeria remained exempted from the cut, with both countries having made public their plans to further boost their oil output into seven-figure territory before the end of the year. Non-OPEC producers besides the U.S., such as Canada and Brazil, are also expanding their output.
In this context, OPEC’s task, as suggested by Goldman, to push prices up, keep stockpiles within reasonable limits, and maintain market share looks very much like OPEC trying to both have their cake and eat it, too. Perhaps Texas Railroad Commissioner Ryan Sitton was correct when he said yesterday that “The days of OPEC using oil supplies and prices as a political weapon are gone.”
By Irina Slav for Oilprice.com
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