Another Year of Oil Cutbacks Possible as Oil Producers Eye Long Term Alliance

Friday February 16, 2018

The announcement of a long term alliance between oil producers led by Saudi Arabia and Russia to be ratified by the end of this year is being sold as a safeguard against any wild market price upswings as well as a way to protect the market rebalance supposedly being achieved by the Organization of the Petroleum Exporting Countries' (OPEC) production cuts.

However, the announcement comes on the heels of observers wondering why, if OPEC and its allies are so close to rebalancing the market, they are moving so aggressively to change the goalposts.

Suhail al-Mazroui, energy minister for the United Arab Emirates, told media of the alliance formation, saying OPEC was urging its members to build oil capacity buffers to temper any wild upswings in price due to the weak U.S. dollar this year.

Mazroui, who is also president of OPEC, said, "That buffer is [to ensure] that if you have a surge [in demand] or issue in one of the countries you can replace that in the market and achieve a short and medium-term re-balance of the market."

Without elaborating on the strategy, he added that a draft framework might be endorsed and signed by all 24 countries before the end of the year.

However, earlier this week both Saudi Arabia and Russia admitted publicly that the metric to measure stockpiles is flawed and must be replaced - which implies that any claim made by OPEC or other parties about the true state of the crude market is questionable at best.

Bloomberg speculated that "Choosing a different measure of success could further reinforce the need for supply curbs to continue for the whole of 2018 -- something Saudi Arabia is keen to ensure as it prepares the historic initial public offering of its state oil company."

The news agency went on to list a number of possible methods that could be used to calculate stockpiles, noting that "in reality there's little reliable data for anywhere outside the 34 countries that make up the Organization for Economic Cooperation and Development."

No other news agency and virtually no analysts have yet come forth to discuss the implications of a chief OPEC member and its top ally admitting that a preferred way of determining crude stockpile number s is deeply flawed, and this left the field open for the ever-optimistic Emmanuel Ibe Kachikwu, oil minister for Nigeria (one of many countries attempting to boost rather than reduce production), to tell media that he is "not ruffled" by the recent oil price decline and OPEC member nations need to focus on their production costs.

Pointing a finger at a familiar and convenient scapegoat, he said, "OPEC needs to just focus on itself and focus on what it needs to do and forget what is happening in [U.S.] shale ... Every OPEC producer must work hard to be a least-cost producer."

Khalid al-Falih, energy minister for the Saudis, earlier this week told reporters in Riyadh that it's better to "stay the course and make sure that inventories are where the industry needs them" -  and almost in the same breath he admitted that finding reliable inventory data has been a challenge to more than a year of oil output cuts designed to end the global glut.