A month ago when OPEC extended its production cuts to to the end of 2017, Saudi Arabia promised to do “whatever it takes” to stabilize oil prices.
Now it’s not at all clear what the Saudi’s can do.
The dual problem is rising production from countries outside the OPEC agreement and rising U.S. production. Libya and Nigeria, two OPEC members specially exempted from the OPEC cuts, have ramped up production. Libya is now pumping about 900,000 barrels a day, the most in four years. Nigeria has restarted a major export terminal shut by sabotage and will ship about 250,000 a day this month. In the U.S., crude production rose to 9.35 million barrels a day last week, the highest level since August 2015, and higher than OPEC had anticipated when it struck its agreement on production cuts.
Theoretically, OPEC could address the problem by cutting production even further but that seems unlikely. OPEC producers are reluctant to cede more market share The International Energy Agency projects that demand for OPEC oil will fall by 200,000 barrels a day in 2018 as other suppliers meet demand. Non-OPEC producers that signed on to earlier production cuts are now saying that they won’t reduce production further. Russia, for example, has said that it opposes further cuts.
In any case, it took months to hammer out the last agreement. Oil markets don’t expect any move by OPEC now would happen any faster.
Which leaves the oil market to clear on its own as oil prices fall to levels that lead to cuts in production by U.S. producers, now the swing producers in the market. Where is the price level that would cause those production cuts? South of $40 a barrel, many oil analysts say. At that level a significant number of U.S. shale oil producers in regions with slightly higher costs might decide to drill wells but leave them uncompleted until prices move higher. Watch the weekly drilling rig report from Baker Hughes due out later today and totals on drilled by uncompleted wells.