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Saudi Arabia and Russia Extend Oil Production Cuts, Bolstering Prices As Their Clout Wanes, Saudi Arabia and Russia Extend Oil Production Cuts
(about 2 hours later)
Saudi Arabia and Russia announced on Monday that they would cut their oil production for longer than they had planned, bolstering oil prices and pre-empting a meeting of major crude exporters next week. Global oil producers have been trying for months to bolster flagging prices, and on Monday the world’s two biggest crude exporters moved again to get markets in line, promising to cut output for longer than they had planned.
The countries, the world’s two biggest oil exporters, agreed to lower their production levels for nine months more than originally planned, through March 2018. The move means the Organization of the Petroleum Exporting Countries is likely to follow suit when its members meet in Vienna on May 25. But they face a problem: their clout is ebbing.
OPEC, whose 13 member nations account for about a third of global crude output, and Russia agreed last year to reduce production in the hope of lifting prices. The move has been a qualified success; though crude prices have not increased significantly and are hovering around $50 a barrel, they have not fallen to their lows of early last year, when they were below $30 a barrel. The announcement from Saudi Arabia and Russia that they had agreed to lower their production levels for nine months longer than originally planned, through March 2018, quickly bolstered prices. And their decision means the Organization of the Petroleum Exporting Countries is likely to follow suit when its 13 members meet in Vienna on May 25.
In a statement, Saudi Arabia and Russia said they had “agreed to do whatever it takes to achieve the desired goal of stabilizing the market,” adding that the deal to reduce production should be extended through the end of March. OPEC, of which Saudi Arabia is the de facto leader, and Russia agreed to implement production cuts late last year in an attempt to solidify oil prices, which had careened from well above $100 in 2014 to below $30 early last year. They have largely held to those lower output levels, helping lift prices by about a fifth.
Still, a series of factors — from immediate issues like high levels of unsold crude sitting in storage facilities to longer-term trends like the move toward electric vehicles — mean that the two countries, and OPEC more broadly, are no longer the dominant voices of the world oil market.
“What OPEC, and to some extent Russia, and these other countries have been doing since the price collapse of 2014 is pretending to manage the market,” said Robert McNally, a former White House energy adviser who is president of The Rapidan Group, a Washington-based research firm, and the author of a recent book on oil booms and busts called Crude Volatility.
In reality, Mr. McNally said, they were simply “managing or manipulating sentiment.”
It represents a marked shift for a bloc that even today accounts for about a third of the world’s oil production, and which over its six-decade history has enjoyed periodic success at orchestrating output to achieve desired price levels. In the late 1990s, a series of cuts by OPEC, as well as other producers outside the organization, lifted prices after a collapse to the $10 per barrel range.
Now, however, several trends are against it.
In the short term, large amounts of crude remain unsold and in storage, offsetting the impact of some of the production cuts. And higher prices in recent months have thrown a lifeline to shale oil companies in the United States, where output had plunged when prices had fallen. With prices around $50 a barrel, shale companies are surging again.
Analysts said that shale and other sources were likely to fill in whatever gaps OPEC production cuts created in the market.
“It is now becoming very clear that the cuts aren’t making the oil market rebalance sooner,” said Rob West, a partner at Redburn, a London-based market research firm. “They are prolonging the glut.”
In the longer term, increased use of electric cars and more efficient use of energy may contribute to slowing growth in world demand, analysts say.
OPEC could throw up its hands and stop trying to manage markets, but it tried that strategy three years ago, and does not have fond memories of the experience.
At the time, Saudi Arabia shocked the markets by declining to intervene in the midst of a stunning price fall — a swoon from over $100 per barrel caused mainly by rising supplies, particularly from the United States. Riyadh argued at the time that boosting prices would just spur investment in rival sources of energy, and hoped that lower prices would kill their growth.
With the threat of an OPEC production cut removed, prices dropped below $30 per barrel early last year, forcing the Saudis, whose government budget depends heavily on oil revenue, to reconsider.
Ali al-Naimi, the Saudi oil minister for two decades, lost his job and his successor, Khalid al-Falih, a veteran oil executive, traveled the world promising to restore balance to the market. Those efforts ultimately paid off when OPEC and other major producers like Russia agreed to trim output.
It appears that for now, they are sticking to that path.
In a statement on Monday, Saudi Arabia and Russia said they had “agreed to do whatever it takes to achieve the desired goal of stabilizing the market,” adding that a deal between major oil exporters to reduce production should be extended through the end of March.
The two countries said they would work with others ahead of the Vienna meeting, “with the goal of reaching full consensus on the nine-month extension.”The two countries said they would work with others ahead of the Vienna meeting, “with the goal of reaching full consensus on the nine-month extension.”
Oil prices rose sharply after the statement was released, with West Texas Intermediate crude gaining 3.4 percent to $49.45 a barrel, while Brent crude rose 3.3 percent to $52.52.Oil prices rose sharply after the statement was released, with West Texas Intermediate crude gaining 3.4 percent to $49.45 a barrel, while Brent crude rose 3.3 percent to $52.52.
“What they looked to do is send a positive surprise by exceeding market expectations,” said Richard Mallinson, an analyst at the research firm Energy Aspects. He said that oil traders had so far been skeptical about the positive impact of the cuts. “What they looked to do,” said Richard Mallinson, an analyst at the research firm Energy Aspects, “is send a positive surprise by exceeding market expectations.”