Will OPEC’s further oil production cuts work?

08/12/2019

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THIS is the question that is being debated by oil and energy experts. Will this further reduction of 500,000 barrels by OPEC-plus lead to retaining the oil prices within the range of $60 per barrel, even though other OPEC members are still not adhering fully to their agreed oil reduction, namely Iraq and Nigeria?

This is a very hard decision taken solely by Saudi Arabia to ensure stability of oil prices. It seems more likely that Saudi Arabia will take upon itself the full burden of a huge decrease of 400,000 barrels per day from next year, if not earlier. Of course, there is concern about the incoming volumes of oil from other non-OPEC countries, which will tilt the oil market towards surplus and fill it with crude oils from various parts of the world.

The continuous pouring of shale oil will next year reach about two million barrels in volume from Brazil, Canada, Norway and Guyana, thereby adding more than four million barrels within the next few years. Certainly, the oil market is not optimistic that OPEC’s decision of last Friday will maintain oil prices to either remain strong or stabilize it at the current level of $64 per barrel. The likely case is that the prices will go down, but hopefully not below the magic number of $60.

OPEC and its partner Russia did not mention any price level but rather stated that the market needed re-balancing and elimination of any surplus oils. From now on, the market needs to watch out for OPEC’s adherence to its members’ quotas, how the main culprits like Iraq and Nigeria will act, and if they will reduce and stick to their quotas in the future months.

For how long will Saudi Arabia shoulder the heavy responsibility and take deeper cuts of further 400,000 barrels per day or close at 1.3 million barrels, thereby producing 9.3 million barrels, knowing that, the harder the oil price becomes, the harder it will be for OPEC and its partners to stick to their production cuts? We may find out by the end of next quarter next year.