OPEC Has a Glitch in Its Oil Curbing Plan

OPEC Has a Glitch in Its Oil Curbing Plan

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The Organization of Petroleum Exporting Countries (OPEC)’s failure to take action with cuts could have crude oil plunging to $40 per barrel. OPEC’s oil curbing plan is failing due to non-compliance from its producers and production has fallen to their lowest within six months. As a result, OPEC has a glitch in its oil curbing plan.

The market is unbalanced due to several OPEC producers over pumping oil, which is not allowed. Compliance decreased to 78 percent in June 2017 from 85 percent in May. Only a handful of countries are in full compliance to limit crude oil production.

OPEC agreed to lower production by $1.8 million barrels per day. This will remain in effect until March of 2018 to ease the U.S. crude output and raise prices.

Several OPEC producers involved in the over-pumping include Algeria, Ecuador, Gabon, Iraq, The United Arab Emirates, and Venezuela. They offset the OPEC production compliance of Saudi Arabia, Kuwait, Qatar, and Angola.”Financial data suggest that while output might be gushing, profits are not and recent press reports quoted leading company executives saying that oil prices need to be around $50 per barrel to maintain production in growth,” said the International Energy Agency (IEA).

“Financial data suggest that while output might be gushing, profits are not and recent press reports quoted leading company executives saying that oil prices need to be around $50 per barrel to maintain production in growth,” said the International Energy Agency (IEA).

The IEA also stated, “While the top producer, Saudi Arabia, continues to deliver on its promise to cut output, several other producers have not so far fulfilled their commitments.” Demand for OPEC’s crude oil rose throughout 2017 to 33.6 million barrels per day during the fourth quarter.

Saudi Arabia produced 10.05 million barrels a day in June 2017, which was their first time going over compliance productions. Libya and Nigeria have managed to increase production by more than 700,000 barrels per day in recent months, which has exempted them from cuts.

Cuts will be around $45-$50 per barrel, but prices have been renewed under pressure due to the U.S output increase. The U.S. crude production is increasing more than 9 million barrels per day. This has resulted from the number of rigs, which have doubled, and the fact that the IEA expects the U.S. crude production to grow by 700,000 barrels per day.

Analyst Michele Vigna from Goldman Sachs Group stated, “While the industry has adapted to lower oil prices, through increases insufficiency and cost deflation, OPEC budget needs have been sticky, making it difficult for them to lower their fiscal break-even.”

On July 24, 2017, the Joint Ministerial Monitoring Committee (JMMC) gathered in Russia to discuss the two producers current production and short-term plans. There are talks of capping the two nations’ output. Without the steeper cuts, oil prices decrease.

Analysts predict that the OPEC two producers can agree to cap output when meeting a target. If they limit their output, all other producers may have to review their quotas. This could fix the glitch in OPEC’s oil curbing plans.

The IEA stated, “Each month something seems to come along to raise doubt about the pace of the re-balancing process. This month, there are two hitches, a dramatic recovery in oil production and a lower rate of compliance on its own times.” Both Russia and OPEC say nothing is off the table when asked if they will cap Nigeria and Libya output.

Oil Minister Emmanuel Kachikwa said, “You have to wait for a couple of months to be sure that what you see its pace is in fact sustained.”

Written by Nicole Thompson
Edited by Leigh Haugh

Sources:
Bloomberg–These Numbers Show The Huge Challenges Facing OPEC Members
CNN–Cracks are Showing in OPEC’s Plan to Curb on Oil Supplies
OPEC Official Website
Featured Image and Top Courtesy of Alex.Ch – Creative Commons License

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