The world’s two largest crude oil exporters (Russia and Saudi Arabia) came to an agreement yesterday on the need to extend production cuts, in order to rebalance supply and lift prices.
Saudi oil minister Khalid al-Falih has been traveling the globe for quite some time now, bringing with him the promise to rebalance supply. Yesterday, that the market seemed to like what it saw, but some analysts feel that the bulls will only be kicking for the short-term.
According to former White House energy adviser Robert McNally, OPEC and non-OPEC countries (such as Russia) have less control than most people would like to think. He believes that OPEC and their non-OPEC friends only pretend to be the driving force behind the market, when in reality they have much less power today compared to years ago. In the latter half of the 1990s, a collection of production cuts by OPEC and other nations was able to create a shift in oil prices somewhere around the $10 per barrel range.
A common view continues to be that production cuts alone have not been able to rebalance the market, however it has kept the supply glut from worsening. So how will the market ever get rebalanced? No one can seem to figure this out. Do more nations need to get on the same page regarding production cuts or do the largest producers need to scale back production even more than they are currently?
If you take a look at the April numbers, you will see that certain nations may be producing less, but the question is, are they cutting enough? In the month of April, Saudi Arabia pumped out 170,000 fewer barrels per day than in April of 2016. Is that enough, when countries such as Libya are doubling their production levels in comparison to last year? Probably not, since Libya is producing over 800,000 barrels per day vs. last year’s volume, which was about half of this figure.
The countdown continues until the big OPEC meeting on May 25th. It will be interesting to see if the market will continue to run with the bulls or if it will have already priced-in the expectation for OPEC to extend cuts. Time to either get that crystal ball out or start studying the data and trends. If you’re anything like me, you’ll be watching WTI closely to see if crude can stay below the $50 threshold.
As of 10:00 a.m. ET, distillates and RBOB are up around 1.5 cents, while WTI crude sits slightly above $49 dollars.
In other news:
- Iran likely to join production cuts
- Libya and Nigeria continue to raise production
- Uncertainty surrounding Iraq’s plans regarding oil production