Opec promises “whatever it takes”

It was only as recent as last month when the oil prices had gone down to pre-Opec deal levels, nearly wiping off the small strides made post the production cut deal. All eyes were then and even now are pinned on the upcoming Opec meeting on May 25, and the signals from the market suggest the major oil producers have done enough talking to calm some jittery nerves, as crude was seen moving back in the$50s per barrel.

In an unusual move, world’s two largest crude oil producers Saudi Arabia and Russia issued a joint pledge last week, informally announcing the extension of the deal to March 2018. Although, no details have been shared yet as the market has been left to guess the quantum and the impact of deal, the move seems to be have motivated by stubborn technical resistance of crude oil price below $40/bbl. Many believe that it needed more than hollow anticipation of the OPEC outcome to jack the prices up once again. That motive has been achieved, as many pundits have pointed out that the Opec deal factor this time around, many not have the kind of reception it did last time.

And there are reasons why. Saudi Arabia has stuck to its word and has rather made more than its share of cut. That said, current freezing of production has not worked as much as Opec members would have liked. This leaves many wondering how and why would just a mere extension lead to rebalancing of supply and demand and fasten the pace of inventory decline.

Recall that all this while US shale producers have steadily grown in stature. The breakeven cost for shale producers has been cut to half in less than a year, and that is where it seems difficult how the continuation of the current Opec supply cuts would be a dent on production. The chances of Opec members agreeing to a bigger cut appear slim, and the price movement seems to be reflecting that too.

So when Saudi Arabia and Russia say that they will do “whatever it takes” to give comfort to the market, it may well be directed at some temporary relief to push oil prices in a safer range of $50-55/bbl. The rebalancing appears to be taking longer than originally anticipated, and inventories have not receded as briskly.

Meanwhile, US rig counts keeps on increasing every week, and now stands at an all time high. The shale production is tipped to reach 10 million barrels a day by next year. One way to have a greater impact deal is to include non-contributing Opec members to the cuts, without increasing the bar from current levels. But the situation on ground for the troubled oil producing countries has not improved one bit, and this remains a distant option.