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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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OPEC Thinks Deeper Cuts Might Not Be Required

The addition of another couple of smaller producers to the OPEC-non-OPEC oil production cut deal will be enough to bring global supply to a more acceptable level. That’s what Saudi Oil Minister Khalid Al-Falih said at a news conference in Riyadh.

The reduction will take the whole nine months of the output cut extension that should be announced next week at OPEC’s Vienna meeting, Al-Falih said. “We believe that continuation with the same level of cuts, plus eventually adding one or two small producers … will be more than adequate to bring the five-year balance to where they need to be by the end of the first quarter 2018.”

The initial deal failed to bring supply back within the limits of the five-year average, which is considered by OPEC to be a fair measure of oil’s fundamentals.

The new potential additions to the deal were not named, but there are also reports that OPEC may deepen the cuts, according to Reuters. This pushed prices up, so both Brent crude and West Texas Intermediate started the week with gains. For now, the prospect of deeper as well as more extensive cuts is only a rumor, but it could turn into reality as OPEC is eager to demonstrate its willingness to do whatever it takes to prop up prices. Related: Today's Stunted Oil Prices Could Cause Oil Price Shock In 2020

Meanwhile, shale producers are continuing to boost their production, with Goldman Sachs reporting a staggering 128-percent increase in the number of active drilling rigs since May. In absolute terms, the increase is of 404 rigs, allowing the shale patch to increase output to 9.3 million bpd, or 10 percent more than in mid-2016. This has the U.S. breathing down Saudi Arabia’s neck as the world’s third-largest producer, and raises the stakes for the output cut extension.

If the U.S. continues to build production, which in all likelihood it will, and with Nigeria and Libya also boosting their crude output, the rest of OPEC, Russia, and their partners face an uphill battle to keep prices rising over the second half of 2017 and the first quarter of 2018.

By Irina Slav for Oilprice.com

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