Energy Economy

Will OPEC Stick With Its Production Cuts If Oil Prices Keep Rising?

The production cuts initiated last January by Organization of the Petroleum Exporting Countries (OPEC) and its allies — particularly Russia — had drawn down oil supplies in the world’s developed countries by an estimated 115 million barrels in the 12 months through October 2017. Tightening supply has predictably raised prices, and Brent crude now trades right around $70 a barrel.

The cartel and its allies face the threat that rising prices will encourage new production, especially in the United States. U.S. production is now forecast to rise to 10 million barrels a day by next month, fully four months faster than previously expected. If production rises even more, prices could come under pressure.

Last month Saudi Arabia persuaded OPEC and Russia to stick with the production cuts through all of 2018, although the kingdom did agree to revisit production levels at OPEC’s June meeting at Russia’s insistence. According to a report at Bloomberg, some banks now think that the cuts will be lifted sometime this summer.

But production cuts are not the entire story. Central banks like the U.S. Federal Reserve are on the lookout for rising inflation and could take steps to tamp down inflation if they see it rising too fast. Bank of America analysts see small monthly increases beginning next year to raise production from OPEC and its allies again.

Other bank analysts believe the increases could come sooner. Societe Generale analyst Mike Wittner told Bloomberg:

They’re very close to their goal when they meet next and they will achieve their goal in the third quarter. So the second half of the year could well be when they start [phasing out the cuts].

The threat comes not just from onshore shale production, but prices are now high enough that major multibillion-dollar offshore projects could get financing. Rising production from deepwater projects and Canada’s oil sands increase the threat.

OPEC has never had much luck hitting an oil price target with any accuracy. That’s not especially surprising given the vagaries of the crude oil market. However, if the cartel tries to get to fine this time around, all the sacrifice they and their partners have made over the past year could unravel quickly.

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