Oil cartel Opec has given up on hoping that US shale oil producers will go bankrupt before its members do.
The world’s oil producers have managed to endure two years of fighting for market share, leaving oil prices to find their own level in a semblance of a “free market”.
But the pain has been too great. Saudi civil servants aren’t used to taking pay cuts of 20%. There’s only so much of that sort of thing a society can tolerate.
So now they’ve called time on the war of attrition. They’re determined to keep oil prices above $50 a barrel.
And with Russia chumming up with the cartel, they might just manage it…
The world’s oil producers have thrown in the towel
Earlier this month, contrary to what everyone (including me) expected, oil cartel Opec managed to come to a sketchy deal to curb output.
Opec agreed to cap their output at 32.5 million barrels of oil a day, starting from next month. From current estimates, that’d be a cut of nearly a million barrels a day. That would be the first production cut in eight years.
That surprising level of agreement triggered a surge in the oil price. And yesterday, at another energy meeting in Istanbul, Russia decided to keep the momentum going. The country – a non-Opec oil producer – said it is ready to join the oil cartel in a deal to trim output.
Quoth Russian president Vladimir Putin: “Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join.”
The oil price hit its highest level since this time last year. Both Brent crude (the European benchmark) and WTI (the US one) are above $50 a barrel now.
They will of course, have to deliver on the production cuts to keep this going. But they’d have to be pretty stupid not to. And given the efforts it has taken to get to this point, it would be strange to fall at the last hurdle.
Won’t a higher oil price just encourage US shale producers to ramp up production? Not necessarily, according to respected oil market analyst Gary Ross of US-based PIRA. He tells Reuters that “the timing of this is quite deliberate. Opec is doing this heading into winter and at a time when supply from non-Opec producers is down.”
In short, demand will go up as the cold weather sets in. At the same time, low prices have forced shale producers to cut investment and shed workers over a prolonged period. It’ll take them time to come back from that – enough time to allow Opec to take advantage of higher winter fuel demand.
“The policy to push for market share is over. It’s a matter now of going back to managing the market.”
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