Running Out of Runway | Russell T. Rudy Energy LLC
Last year OPEC, Russia, and 10 other non-OPEC producing nations agreed to cut back production, effective January 1, 2017. The express purpose was to bring down global crude oil inventories to the 5 year average level. The unstated, but real, purpose was to restore oil prices. The original agreement was to stay in effect for the first half of 2017. While many industry observers have been surprised at the high level of compliance with output quotas, and inventories have come down, success seems illusive.
Initially, there were several problems. The agreement was signed in late 2016 and several parties to the accord ramped up production in anticipation of the cutbacks. Also, U. S. shale operators saw the opportunity to fill the production gap with increased domestic output. This led to increases in inventories in the developed economies which offset decreases in emerging nations.
“Rigzone” reports that U. S. production has climbed to 9.25 million barrels per day (bopd) and the rig count continues to rise. Domestic stock piles alone are 100 million barrels above the 5 year average. While OPEC and its allies are making progress, even Saudi Oil Minister, Al-Falih, admits that after 3 months of production cutbacks, their goals will not be achieved by mid-year.
Bloomberg predicts that by the end of June, global oil inventories will still be 200 million barrels above the 5 year average. This would represent a 100 million barrels reduction from year end 2016 levels, but Fereidun Fesharaki with consulting group FGE contends that at current rates of production and consumption, the goal will not be achieved by the end of June of 2018.
The current cutback agreement expires at the end of June and the signatories to the accord are meeting next month to discuss whether to extend it for another 6 months.
Fesharaki concludes, “We’ve seen a drawdown of oil from floating offshore inventories, but onshore inventories are still building. We need to see some significant declines in onshore inventories, otherwise the OPEC deal will need to be extended to next year.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2017/4/25/oil-veteran-says-opec-needs-year-to-pull-off-elusive-mission .
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