Have Oil Cuts Rectified the Over Supply Problem?

19 May 2018

Lab Chat

Since late 2016, the Organization of Petroleum Exporting Countries (OPEC) has been imposing oil cuts on its members, along with allied nations such as Russia. The aim was to stop oil being oversupplied and increase its price as a result. So, more than a year down the line, has it worked? Read on as we look at how effective OPEC’s production cuts have been.

The introduction of production cuts

OPEC’s plans to cut production were originally announced on November 30th 2016, when they pledged to remove 1.2 million barrels per day from global oil production. It was the first cut in production announced by the alliance since the 2001 agreement. Originally planned for the first six months of 2017, the cuts have been extended repeatedly – leading many to wonder when the production cuts will actually end.

They’re now planned until the end of 2018. Well into the year, it’s left a number of oil producing nations feeling slightly frustrated. Non-OPEC Kazakhstan and OPEC members Iraq, who both agreed to the deal, have been producing far above the targets agreed with OPEC.

85% of the problem removed

Despite some unrest and non-compliance, United Arab Emirates (UAE) representatives have made a promising statement of support for the programme of cuts. Suhail Al Mazrouei, UAE Energy Minister, suggests that “85 percent of the [oversupply] problem” has been rectified by production cuts since 2017.

Looking to the future, Mazrouei – who is currently serving as the OPEC president – stressed the importance of continued co-operation, even when the oil market becomes rebalanced. So far in 2018, Brent crude has seen a 1.5 percent gain.

Trade war fears?

The Brent benchmark fell 2.5 percent at the start of April, following China’s imposed tariffs on US goods. This was a retaliation to US tariffs, and the latest episode in a dispute saga between the two major economies. In an interview with Bloomberg, however, Al Mazrouei was calm in the face of a potential international trade war and how it could impact the crude market.

“I’m not that concerned about a trade war getting to the oil market,” he explained. “It may affect the cost of drilling, the cost of completion, but I think overall the effect is going to be minor to the oil prices.”

With plans to reduce the impact of any more production cuts, such as adopting a seven-year inventory average, it seems OPEC is well prepared for what the future could throw at them.

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