Since early 2017, OPEC, led by Saudi Arabia, and non-OPEC oil producers, led by Russia, agreed to cooperate together in an attempt to reduce the glut in crude that OPEC created when, in late 2014, it tried to flood global markets with oil in attempt to hurt U.S. shale producers, who were eating into OPEC market share. The plan, as it turned out, proved a colossal disaster for the architects of the glut and since then 25 oil producing nations who came together and agreed to reduce oil output, have been successful in restoring crude values with a better alignment of global fundamentals in accordance with supply and demand.
But the reality of a target set, and now met, appears to be the catalyst for the unwinding of this grand deal. Ahead of today’s OPEC summit is evidence that the major proponents of the production quota deal, Saudi Arabia, the UAE, Kuwait and by its own admission, Russia, have all increased oil output and exports in the weeks leading up to today. The softening of the stance taken by Iran may also have been a factor in permitting an increase in output. It’s not the 1.5 million barrels talked about over the last two weeks and strongly opposed by Iran and other smaller members of the cartel. It represents a compromise of 800,000 to 1 million barrel increase in the second half of 2018. With Venezuelan output decreasing by 32% in the previous month and general consensus over the fact that global demand will likely rise 1.5 million barrels a day, the increase may turn out to fall short of implied world demand, creating a scenario of upward prices in the next several weeks.
The increase also represents uncertainty over tomorrow’s scheduled meeting between non-OPEC and OPEC members. Indications are that the extent of rigid cooperation and discipline in sticking to crude production quotas seen over the last 20 months may not hold as the threat to oversupply and associated low prices, seem unlikely to be allowed to be repeated.
As U.S shale production closes in on what many believe will see domestic production reach 11 million barrels a day and crude stocks continue to dwindle, as seen this past week when the EIA revealed a near 6 million barrel draw in inventories, any form of quota in an era of strengthening economic forecasts, could send crude prices back to last month’s heights and more. Although a formal agreement between 25 oil producing countries may be drawing to an end, there is little doubt that its success in supporting prices will be deployed again, should there be an unexpected surge in new oil production or slump in demand.
With summer 2018 upon us, the early January GasBuddy Outlook 2018 prediction of pump prices being the most expensive of any year going back to 2014 holds true for the year, as well as the summer ahead.