Is Extending OPEC Cuts a Done Deal?

Last week. oil prices in New York saw their highest weekly gains since December. This is because some members of the Organization of the Petroleum Exporting Countries (OPEC) pledged to consider extending their pact to reduce supply and to restore balance in the market. The market reacted in full swing. but can an extension of the cuts deal be considered a done deal? There is mounting evidence to suggest that an extension of the deal that will otherwise expire in June is necessary. First of all. the excess in stored oil worldwide is still high. Estimates from two OPEC countries. Kuwait and Qatar. puts it at around 285 million barrels above the five-year average. With daily global oil consumption of around 94 million barrels. the excess in stored crude in industrial countries is equal to a full three days of consumption. With US crude stockpiles swelling to record levels and prices hovering around $50 a barrel. OPEC and its partners have little choice but to keep going. Second of all. demand was low in the first quarter of this year due to refinery shutdowns for maintenance in the US. This by itself puts 1 million barrels a day of refining capacity out of service during the period. For the deal to work well. demand must be at the highest rates in order to absorb the excess supply in the market that is stored in countries from the US to China. So the best option is to extend the deal into the second half of the year and benefit from the third quarter. when demand throughout the year hits its highest point. as suggested by Qatar’s Energy Minister Mohammed Al-Sada last week in London. Last of all. the compliance of member countries to the deal with their pledged cuts is still not at 100 percent. According to the OPEC and non-OPEC Ministerial Monitoring Committee (MMC). OPEC members and their non-OPEC allies had a combined compliance rate of 94 percent in February compared with 86 percent in January. Although this improvement is hailed by the market and the ministers. it is not enough to dry up excess oil in storage. Kuwait’s Oil Minister Issam Al-Marzooq stressed on many occasions recently that 100 percent is needed in order for the market to rebalance in the third quarter of this year. otherwise rebalancing will take more time. A compliance committee of OPEC ministers from Kuwait. Algeria and Venezuela and their counterparts from Russia and Oman concluded meetings in Kuwait City last Sunday with a statement asking OPEC to review the market and give them a recommendation in April on rolling over the cuts. So it seems that an extension of the deal is on the way to becoming a done deal. yet there are voices that suggest to wait until more data is available to better assess the situation. Russia’s Energy Minister Alexander Novak said last week that it is too early to talk about an extension and that his country will not make any pledges until April. Russia needs more time to assess the market. inventories. and production in the US and other non-OPEC countries. Novak said in an interview with Bloomberg television after the committee meeting in Kuwait.
 

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