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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Is Russia Bailing On The OPEC Deal?

Offshore rig

For the first week of June, Russia, the world's largest oil producer, exceeded the amount it agreed to produce as part of the January 2017, OPEC/non-OPEC supply cut deal.

For the first week of June, Russia produced some 11.1 million barrels per day (bpd), far exceeding production limits outlined in the deal, Interfax news agency said on Saturday, citing a source familiar with the matter.

As part of the oil production cut, Russia agreed to trim its production by 300,000 bpd from 11.247 million bpd. The output cut deal called for its members to remove some 1.8 million bpd of oil from global markets.

That deal was orchestrated to stop the bloodletting in global oil markets at the time due to a ramp up in U.S. shale production and Saudi Arabia's late 2014 strategy of trying to drive U.S. shale producers out of business by opening the production flood gates and sending prices to multi-year lows.

However, the Saudi’s plan backfired. Global oil prices tumbled from more than $100 per barrel in mid-2014 to under $30 per barrel by the start of January 2016, throwing global markets into a historic supply overhang, and causing financial chaos for the Saudis who had to start issuing international bonds to offset record budget deficits - a development that is still ongoing as the Kingdom shores up its finances from that low oil price period.

Now that OECD oil inventory levels have reached the OPEC/non-OPEC members’ goal of five-year averages, there is talk and speculation among not only media but oil producing countries asking if it’s time to ramp up production. Also, geopolitical factors are coming into play as renewed U.S. sanctions against Iran will remove as many as 500,000 bpd from global markets, perhaps more according to other forecasts. In addition, OPEC member Venezuela's oil production is coming apart at the seams, also removing more barrels from the market. Related: Microsoft Launches Second Subsea Data Center

Moreover, the production overage the first week in June could indicate Russia’s strategic thinking that it’s time to increase production.

Alexander Dyukov, head of Russian energy firm Gazprom said on Saturday that his company is ready to hike crude oil production if the global deal on oil production cuts is modified.

“It is obvious now that the (production) quotas should be revised, the quotas should be increased, this will be beneficial both for producers and consumers,” Dyukov said after an annual general meeting.

“We believe that the time has come that it makes sense to keep the deal in place but be more flexible on quotas,” Dyukov said.

Saudi Arabia, for its part, is also poised to increase oil output amid reports that President Trump put pressure on The Saudis to reign in higher oil prices that hit the $80 mark last month.

A perfect storm

Saudi Arabia, which has been OPEC’s de facto leader for decades, has also caused a rift in the oil exporting cartel recently by speaking on behalf of OPEC without the consent of all of its 14 members.

Regional rival Iran has taken Saudi Arabia to task over this overture. Last week, Iranian oil minister Bijan Zanganeh said OPEC ministers “have implicitly or unwittingly spoken for the organization, expressing views that might be perceived as the official position of the OPEC.” This is obviously a reference to Saudi Arabia’s comments over the situation.

The obvious tension being felt by Iran over upcoming sanctions ratcheted up yet another level on Friday when the Islamic Republic said that a request from the U.S. to Saudi Arabia to pump more oil to cover a drop in its own oil output was “crazy and astonishing.” It added that OPEC would not heed that appeal. Related: The Real Reason For Higher Gas Prices

However, it’s likely, given the sway Washington still has with Riyadh and both U.S. and Saudi Arabia falling on the same side of trying to prevent further Iranian influence in the region, that Trump’s request will be granted.

U.S. oil production, on the back of shale output is also still increasing, though infrastructure bottle necks will restrain more U.S. oil coming out of the Permian basin until at least some time next year, a development that is also creating a wide divergence between global oil benchmark Brent and NYMEX-traded West Texas Intermediate (WTI) crude. The price divergence as of June 8 stood at neatly $11 per barrel, creating arbitrate opportunities for U.S. producers and traders, particularly in Asia.

The U.S., which bypassed Saudi Arabia recently to become the world’s second largest oil producer is poised to overtake Russia either later this year or the start of next year when U.S. output will reach around 11 million bpd. However, if the OPEC/non-OPEC deal is modified in June, allowing more Russian production, the time frame for the U.S. becoming the top global oil producer will be modified.

OPEC and other leading oil producers including Russia will meet in Vienna on June 22-23 to discuss the future of the deal, which is valid until the end of this year.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on June 11 2018 said:
    The title of your article is based either on wishful thinking or on false assumptions. Russia is not going to bail on the OPEC/non-OPEC production cut agreement.

    You need to look at average Russian oil production over a period of at least six months before suggesting that Russia is exceeding its production quota under the agreement. Production levels by most OPEC members vary from one month to the other.

    Furthermore, Russian President Putin is committed to the OPEC deal and his strategic relations with Saudi Arabia. Therefore, he will not permit Russian oil companies to exceed the country’s production quota under the agreement. He may, however, reverse his decision if Saudi Arabia accedes to President Trump’s request to it to raise its oil production to replace any shortfall in Iran’s oil exports as a result of the forthcoming US sanctions.

    Two important comments about President Trump’s request to Saudi Arabia. One is that it gives the lie to claims by the EIA that US oil production has hit 10.8 mbd. If this is the case, then why does President Trump need OPEC to replace any shortfall of Iran’s oil exports. Why doesn’t he use the so-called rising US oil production to stabilize oil prices rather than ask OPEC. The second is that President Trump believes that US sanctions will impact adversely on Iran’s oil exports. The truth of the matter is that President Trump’s request has everything to do with reducing US oil import bill and far less to do with stabilizing prices because he knows that his sanctions on Iran will not affect Iran’s oil exports.

    Saudi Arabia knows that by acceding to President Trump’s request, it risks unravelling the OPEC deal that has brought an end to the glut in the global oil market and pushed on prices to $80 and also inflicting huge damage again on the Saudi economy which is already bleeding blood and money in the war in Yemen.

    One thing, however, is certain. The next OPEC meeting on the 22nd of June will have great impact on future oil prices and the rapprochement between Saudi Arabia and Russia.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Tony on June 13 2018 said:
    Well spoken Mr. G Salameh , US are a great Show entertainer, and if he is one of the biggest Oil producer, why he import 11 Million of Oil barrels every day !! ??? Strange !

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