Although production restraint has proven slower than hoped by its sponsors at balancing an oversupplied oil market, late-2016 agreements are making history.
When producers agreed to output limits starting last Jan. 1, their deal was to last through June.
Among participating members of the Organization of Petroleum Exporting Countries and nonmember collaborators, the hope obviously was that normalcy by then would have been restored and that crude oil prices would have regained buoyancy.
Observers wondered if the agreement could last 6 months. Yet it not only survived but in May won a 9-month extension.
On Sept. 22, OPEC officials meeting in Vienna with counterparts from Russia, agreed to persevere. Some are discussing another extension.
In the past, the agreements would have unraveled by now. OPEC members would be busting quotas. Cooperating nonmembers would be ignoring promises.
In its September Oil Market Report, however, the International Energy Agency estimated August compliance by the 12 participating OPEC members at 82% and year-to-date compliance at 86%—historically high rates.
For non-OPEC participants, the August compliance rate was 118%, Russia’s an impressive 105%. Average 2017 compliance for the non-OPEC group was 68%.
The demonstrated commitment emerges despite political tensions among OPEC members, especially between Saudi Arabia and Iran, and the slow response of inventories.
Furthermore, supply management faces a new challenge: prompt supply from tight oil plays with lowest costs.
How does a challenging agreement hold together so well?
Desperation, mostly. The shared need to keep oil prices above disastrous levels outweighs geopolitical differences.
However slowly, persistence yields results. Inventories are falling. Demand is rising.
And US drilling is sagging. The Baker Hughes rig count just fell for the fifth time in seven weeks, according to the Sept. 22 report. Strong declines in horizontal oil wells will suppress tight-oil production for a while.
Supply management might yet work in the era of unconventional oil—unless, of course, oil prices spurt, causing OPEC producers to cheat, demand to crater, and tight oil output to surge anew.
(From the subscription area of www.ogj.com, posted Sept. 22, 2017; author’s email: [email protected])