Crude oil production cuts are not working. Crude oil prices were close to their lowest figure since November this morning. There are many doubts regarding the effectiveness of OPEC crude oil production cuts in keeping inventories down and crude prices up. US West Texas Intermediate benchmark price dropped 14 cents to $44.58 a barrel early this morning. Brent Crude futures were down 8 cents at $46.92 a barrel.
Both these benchmark prices are close to what they were towards the end of November 2016 when OPEC (Organization of Petroleum Exporting Countries) and allies such as Russia, announced that the organization members were to cut back on production. This was to reduce excessive stocks and keep oil prices up.
This attempt was undermined by non-OPEC countries refusing to enter into the agreement, particularly the USA. In fact, the US increased oil production, particularly the production of shale oil. Since then, the organization has been fighting a losing battle as worldwide stocks continue to increase. Both the above benchmark prices are 12% lower than on May 25th. This was the date when OPEC agreed the production cut would be extended until March 2018 rather than expiring at the end of this month.
It is not only the US who is continuing to increase crude oil production. Certain OPEC members, including Libya and Nigeria, have been exempted from the cuts. Consequently, production from these countries has also been increasing. Because of this, and also because of the United States refusal to reduce production, we have a situation where crude oil prices are still falling.
The cuts themselves also appear to have been ineffectual. Oil exports from OPEC countries have been reduced by only 300,000 barrels per day during 2017. OPEC had aimed to reduce crude oil production by 1.2 million barrels per day. Cuts by other oil producers, including Russia, were to have reduced oil output by a total of 1.8 million barrels per day. In the USA, production has actually increased to 9.33 million barrels per day – a jump of 10% over the past year.
In order for the OPEC plan to succeed in getting stocks back to a manageable level, the organization would have to cut 34 million barrels a month – a seemingly unrealistic figure. The EIA (U.S. Energy Information Administration) has predicted a decline of 80,000 barrels per day in December. In fact, US crude oil production has been predicted to increase to 460,000 barrels per day in 2017.
This figure will make it exceptionally difficult to get oil prices rising again, let alone back to where OPEC would like them to be. OPEC itself has estimated US crude production to increase to 800,000 barrels per day in 2017. This is significantly different to OPEC’s predicted drop of 150,000 barrels per day in December 2016. The IEA (International Energy Agency) forecasts US crude production to increase by 620,000 barrels per day in 2017. In November 2016, the IEA had predicted US production for this year to be unchanged.
Crude oil production next year is expected to be greater than demand. In other words, stockpiles are expected to increase rather then drop. This will do nothing to get prices back to reasonable levels needed. Too low oil prices can give rise to a number of issues, not the least the fact that oil extraction could become too expensive. Debt could increase, and the use of renewable energy sources could become less attractive.
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