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OPEC, Russia Find Reasons to Keep Cutting After Hitting Goal

Published 04/20/2018, 04:26 AM
Updated 04/20/2018, 04:31 AM
© Reuters.  OPEC, Russia Find Reasons to Keep Cutting After Hitting Goal

© Reuters. OPEC, Russia Find Reasons to Keep Cutting After Hitting Goal

(Bloomberg) -- The oil stockpile surplus that’s weighed on prices for three years is all but gone, but instead of celebrating victory OPEC and Russia are finding reasons to continue production cuts.

The group’s historic agreement has achieved impressive results, wiping out 97 percent of the targeted inventory surplus. Yet the cuts should continue because another important goal -- boosting investment in oil and gas production back to sufficient levels -- remains far out of reach, said Saudi Energy Minister Khalid Al-Falih.

His most important ally, Russian counterpart Alexander Novak, agreed there’s no reason to stop just because the pact’s initial goal -- stockpiles back in line with the five-year average -- is at hand.

“We have our targets, but there’s no strict formula under which we would decide: ‘Well, we’ve reached zero, so we are done’,” Novak told reporters at the opening session of the group’s meeting in Jeddah, Saudi Arabia on Friday.

Crude has surged to a three-year high and the glut that triggered the deepest oil-industry downturn in a generation is all but gone. Yet OPEC’s choke-hold on its own production is only getting tighter.

As oil ministers gathered in the Saudi city that neighbors Mecca for the meeting of the Joint Ministerial Monitoring Committee, the $80 a barrel the kingdom desires was inching closer.

Energy ministers didn’t make any new recommendations or adjust their targets in Jeddah, according to people familiar with the matter. Still, they did give a strong signal of their intentions after more than a year of production cuts and rising prices. Based on recent market data, they would have some justification in declaring victory and phasing out their supply deal, but all indications were that they’ll keep on going at least until the end of 2018.

While soaring U.S. shale production remains a nagging concern, the key players appear to be more fixated on the immediate benefits of high crude prices. Saudi Arabia needs to cover weighty domestic spending and attract investors to a partial sale of its state oil company, Aramco. Russia is relishing its new role as a major Middle East power broker, while also enjoying bigger financial gains than anyone from the accord.

Russian Minister Novak wouldn’t rule out some easing of the production cuts this year, but said it would depend entirely on the situation in the market. For now, the group is cutting ever deeper, and Saudi Arabia’s Al-Falih gently chided nations that haven’t been implementing their fair share of the curbs at the opening session of the Jeddah talks.

OPEC and its allies cut 45 percent to 49 percent deeper than the agreed 1.8 million barrels a day in March, minister said. That’s the biggest reduction ever from the group of 24 nations and compares with 38 percent over-compliance in February.

Much of those additional reductions weren’t intentional, according to the International Energy Agency. An economic crisis and “chronic mismanagement” dragged Venezuela’s output to a multi-decade low, while Angola lost production from aging fields. Others were temporary, such as field maintenance in Algeria.

OPEC’s supply reduction may keep getting deeper due to Venezuela’s worsening economic crisis and the growing likelihood that U.S. President Donald Trump will reimpose sanctions on Iran.

Yet, for all the signs of a significantly tighter market, ministers signaled the cuts would continue. Saudi Minister Al-Falih in particular gave a strong indication that he thought higher prices wouldn’t be a bad thing. Every year the world needs to develop new daily production capacity of about 4 million to 5 million barrels, but that’s not happening right now, he said.

“There is the capacity for higher prices” without hurting demand, Al-Falih said. “We have seen prices significantly higher in the past, twice as much as where we are today” and the global economy has the capacity to absorb them.

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