Oil steadies as OPEC-Russia talks to extend oil cuts even after surplus vanished

Oil surged to a three-year high last week after geopolitical risks including the conflict in Syria and tensions between Saudi Arabia and Iran raised concerns over potential supply disruptions in the Middle East. However, record U.S. crude production remains a major worry for OPEC and its allies, who have been battling to reduce a global glut by curbing supply for the last 15 months.

Kuwait said the Organization of Petroleum Exporting Countries and allied producers will discuss extending an agreement to cut oil output into 2019. OPEC and Russia will meet in Saudi Arabia this week while pending political crises threaten to tighten supplies further, the group seems determined to continue the global production limits beyond the end of the year when they meet in June.

Almost 16 months of output curbs by OPEC and its partners have seen crude rally to a three-year high near USD 70 a barrel. Replenishing reserves after the worst oil slump in a generation, encouraging the producers to extend their intervention even as Venezuela’s petro-economy shrunk and Donald Trump threatens Iran with sanctions.

While analysts warn that price gains could backfire on OPEC by prompting rival U.S. supplies or crimping demand, ministers gathering in Jeddah on April 20 will focus on ways of prolonging their cooperation. That could include new inventory targets that extend the cuts, and laying the foundations for an alliance that will last for years. Any recommendations this week would have to be confirmed at the group’s full meeting in June.

OPEC and Russia, for decade’s competitors in the oil market, forged an alliance in late 2016 to combat the surplus unleashed by a boom in American shale production. Though it’s taken longer than expected, the strategy is paying off. With inventories subsiding to normal levels, the International Energy Agency says OPEC and its partners can declare “Mission Accomplished.”

Cashing In

Saudi Arabia, OPEC’s biggest member, says the curbs should continue at least until their scheduled expiry at the end of the year, and possibly into 2019. Energy Minister Khalid Al-Falih contends this is necessary to ensure markets have properly rebalanced, and that prices are high enough to encourage the global oil industry invests in future supplies.

There are other incentives for sticking with the strategy: the IEA estimates that in the first quarter, OPEC nations earned almost USD 400 million a day more than a year ago because of stronger oil prices. Russia’s budget gained about USD 19.5 billion last year, according to its Energy Ministry.

Petro Politics

Saudi Arabia is said to seek a price increase to USD 80 a barrel, according to a Bloomberg analyst, to cover domestic spending needs and attract investors to a partial sale of its state oil company, Saudi Aramco.

Although Russia, less dependent on oil revenues, Energy Minister Alexander Novak said he supports prolonging cooperation in the direction for Russia to maintain good relations with its Mideast allies.

Regardless of the benefits, continuing to restrain output may be an odd policy for OPEC when accidental supply losses inside the cartel are mounting and other threats of disruption loom.

As oil inventories get closer to the five-year average level, Saudi Arabia has said a new target is necessary to filter out the distortion of excessively high stockpiles seen in recent years. The group is considering using a seven-year average.

On April 18, 2018, West Texas Intermediate rose to USD 67.00 a barrel on the New York Mercantile Exchange.