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Platts Snapshot

OPEC under pressure as oil price gains fade

With Eklavya Gupte

March 27, 2017 12:22:29 EST (3:28)

The OPEC/non-OPEC monitoring committee which met in Kuwait this week concluded that it needs more data to evaluate the cuts. Platts senior editor Eklavya Gupte, looks at some of the options OPEC now has as it faces a market that harbors significant doubts over the effectiveness of the oil output cuts.

Read our analysis: OPEC/non-OPEC committee punts decision to extend cuts to build case

Read the latest about OPEC crude oil output in our OPEC Guide

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Video Transcript

OPEC under pressure as oil price gains fades

By Eklavya Gupte

Welcome to the Snapshot a series that examines the factors driving and shaping global commodity markets today.

On Sunday, the OPEC/non-OPEC monitoring committee met in Kuwait and decided that they would keep observing supply and demand fundamentals for another month, a sign that there is still some indecision on which approach to adopt.

Monitoring committee wants more data to evaluate cuts

This occurred despite growing consensus among participants of the agreement that an extension of the deal past its June expiry is desirable, especially to draw down inventories to their five-year average, which OPEC has said was the main objectives of this deal.

Despite strong compliance from OPEC, the oil market has not responded bullishly as the rebound in US oil production has applied downward pressure on oil prices, threatening to undo its strategy of curbing output.

In fact, oil prices are now back near $50/barrel, exactly where they were after OPEC and non-OPEC signed a landmark deal to cut production by around 1.8 million b/d.

Prospects of further growth in US oil output have also changed the tide and analysts are questioning whether this will motivate a reassessment of the prevailing tactic.

OPEC now faces a market that has significant doubts over the effectiveness of the output cuts.

An increase in oil prices, is likely to cause an increase in shale [production], and analysts have noted that OPEC has to again choose between higher prices or market share.

The 11 non-OPEC members have been collectively lagging in their adherence to the deal, with reports indicating that compliance is about 60%, according to IEA estimates

Russian energy minister Alexander Novak said his country had achieved 185,000 b/d in cuts, and assured it will cut to its commitment of 300,000 b/d by end-April.

The compliance has been led by Saudi Arabia, which has cut 140,000 b/d more than it is required to under the deal, helping cover for less-compliant members.

But the kingdom has made its displeasure with non-compliant participants known, and sources have told Platts that the kingdom may propose tighter conditions and possible ends to or limits on exemptions, for the deal to be extended past June.

Saudi Arabia shouldering majority of burden on cuts

Saudi oil minister Khalid Al-Falih has been more circumspect about the need to extend the cuts and likely will be a linchpin in any policy decision, given Saudi Arabia's status as OPEC's largest producer.

With oil prices marginally above $50/barrel on Monday morning, OPEC will have to tread carefully as oil market volatility persists amid stiff competition from US oil producers.

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