Oil glut officially ended earlier last month. The much talked rebalancing of the international oil market has been achieved. But will this mean an end to the ongoing Opec production cut arrangement? Probably not. This is despite oil’s rally from a 13-year low in 2015 to an almost 4-year high, currently at $75/bbl.
And the reasons are plenty. The most important is sustained global demand from oil importing countries, as global GDP is expected to continue at a healthy rate. The recent IMF report has highlighted some concerns on global growth, and most importantly on oil demand, as most high oil importing countries are faced with deteriorating debt situation.
But Saudi Arabia, leader of the peck, is not done yet. Russia, so far has remained committed to the production cut deal, but some observers say that the patience may soon run out. And there are indications too, as Russia’s oil production last month was at 11-month high, the highest since it entered the deal.
While Saudi Arabia has been signaling to continue the deal, beyond its expiry next month, Russia has been rather careful commenting. And it has reasons as well, as it fears, the lost ground will be taken up by the shale players, as the breakeven cost for shale producers, now sit at a multiyear low of $47/bbl.
But breaking out of the production cut deal would not be an easy call for Russia, as it stands to lose more than Saudi Arabia. Yes, Saudi Arabia is driven more by its short to near term targets, of which fetching higher prices for Aramco is paramount. Saudis are also looking to invest more in the economy through diversification, all of which would need more dollars – and the IMF has hinted at the price level at which Saudi Arabia would be comfortable. And that is too far from today – at $88/bbl.
Moreover, Venezuela’s long absence from the scene provides further cushion to the Opec efforts. That the USA has taken strong exception to the current prices, terming it artificial, adds more to the geopolitical risk premium, and could well play into Saudi Arabia’s hands.
Another variable in the equation is stronger global economic demand, which is expected to add more to the tally than the OPEC impact. Mind you, the OPEC production cut has also meant increased US production – which has touched all time highs, as Shale production has taken off.
The number of rigs is up 25 percent year-on-year in the US alone – and could add to the supply glut before Saudi’s unannounced target of $88/bbl is reached.
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