Despite some made up drama that some people like to make up for these OPEC meetings, the reality is that OPEC and Non-Opec will extend production cuts until the end of the year. OPEC is on track to achieve the goal of totally erasing the global overhang of oil despite doubts from many and may cause a global supply deficit faster than people think. Instead of worrying about an extension of production cuts, the market and OPEC are now focusing on an exit strategy that will respond to a tight oil market ahead.
In the old days, in past production cut deals, it was easy, the cartel would just start cheating on production when demand increased. Yet know that might not be as easy as many in the cartel will feel like they had a big part in the success of this cut and will want to maintain their historical market share. This may not be as easy as it sounds as U.S. oil exports are changing the dynamics of how the oil supply pie will be carved us.
U.S. shale producers hedged almost 897.00 barrels of future shale production, a 147 percent jump from last quarter according to Wood Mackenzie, as quoted by Bloomberg News. This shows that many shale producers can make money between $56 and $60 a barrel. Many believe that this hedge will automatically stymie any future rally, but those who believe that may be underestimating oil demand growth. In fact, a large amount of this additional production may arrive too late to avoid an oil price spike caused by rapidly declining global oil inventories.
So, what is OPEC’s exit strategy? Saudi Minister of Energy and Industry Khalid Al-Falih, as reported by Bloomberg, said that “From the outset, we said we want this correction to be gentle. We didn’t want to rock the oil market and global economy”. He said that it is premature to talk about an exit strategy now because OPEC and its allies are relying on oil demand in the third quarter of 2018 to finally eliminate the inventory surplus that has weighed on the market for three years, Al-Falih said. But the kingdom is open to discussions about how the group could wind down the cuts “very gradually” once its goals are achieved, he said. “We will not lift our foot off the pedal until we are well within the range of inventories we’ve seen when markets are healthy, and investments are flowing back,” Al-Falih said.
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