News ID: 193221
Published: 0225 GMT May 21, 2017

The only option left for OPEC to revive oil market

The only option left for OPEC to revive oil market

By Julian Lee

If OPEC wants to bring down excess stockpiles, it needs to find its courage when it meets on Thursday, dust off its old playbook and make a big cut as it did in the past.

"We're going to do what it takes to bring the industry back to a healthy situation," Saudi Arabia's Energy Minister Khali Al-Falih said in a Bloomberg Television interview in Washington in March.

Nice words, but it's going to take a lot more than words to get oil inventories, or prices, back to where OPEC wants to see them.

In 1998 OPEC slashed output by more than 4.5 million barrels a day to try to rebalance the market after the Asian financial crisis.

Three years later it had to do even more as recession hit demand again, and it cut its collective output target by five million barrels a day. In 2008 it was forced to make another huge sacrifice, with members deciding to chop daily supply by around 4.7 million barrels.

The OPEC cuts agreed last November begin to look rather puny in comparison — the effective reduction in April was around one million barrels a day, against a plan of more than 1.7 million.

In that last big deal, Saudi Arabia agreed to cut its own production by almost twice as much as the 486,000 barrels a day it pledged this time, taking it down to little more than eight million barrels a day.

The consensus view, which the group has done nothing to dispel, is that members will agree to extend the initial six-month cut to last at least 15 months and possibly longer, if inventories don't start falling faster than its own analysts expect.

But the latest cuts have been undermined both from within and from without and simply prolonging them may not soak up the excess even by next March.

The short, sharp intervention envisaged in November has turned into a long, slow grind. If OPEC wants to drain inventories and boost prices, even if only to around $60 a barrel, it needs to cut deeper, not just longer.

Some of the non-OPEC participants have been slow to implement the full reductions they promised – Russia only met its target at the end of April — while rising US production is taking an increasingly big bite out of the cuts that have been made.

A new worry is that output is now rising in both Libya and Nigeria — the two OPEC countries exempt from the deal. They could add around 450,000 barrels of new supply, if recent gains can be consolidated, and will almost certainly get another free pass this time around.

Even the reported cuts in output have not immediately translated into reductions in exports.

And though there have been hints, there are few prospects that more countries will join the deal beyond Equatorial Guinea, which is due to become OPEC's newest member this week.

Looking back at the group's previous big market interventions, they have all been done as a series of cuts, with additional reductions of between one million and 1.5 million barrels a day agreed about every six months. OPEC needs to spring a surprise when it gathers on Thursday.

 

 

   
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