Oil Deal Cuts Set to Continue Regardless of Cleared Glut

Analysts are beginning to worry about OPEC extending its cuts indefinitely. File Image / Pixabay

The Organization of the Petroleum Exporting Countries (OPEC) has for the fifth straight month set a record for complying with its agreed oil production cuts, according to Bloomberg; only non-member Russia boosted its output slightly in March.

And even though the news agency didn't bother to reiterate the familiar argument that compliance on the part of countries such as Libya and Nigeria have been due to circumstances beyond their control rather than a willful attempt to curb production in the collective spirit of rebalancing the global market, most analysts are convinced that the market is tightening.

On Thursday, after West Texas Intermediate settled 18 cents lower at $68.29 per barrel and Brent  ended at $73.78 per barrel, up 30 cents, Anthony Scott, managing director at BTU Analytics, said, "Overall the supply-demand equation is fairly balanced.'"

Moreover, two sources familiar with the matter told Reuters that a joint OPEC and non-OPEC technical panel has decreed the global glut to have been virtually eliminated, with inventories in developed nations in March at just 12 million barrels above the five-year average.

Of course, not everyone is convinced the glut has been conquered: there is still strong evidence of oversupply in many quarters, something that Mohammed bin Hamad Al Rumhi, oil minister for Oman, reportedly agrees with.

Still, the general consensus is that the worst is over; and yet, as Mike Wittner, head of oil market research at Societe Generale SA, pointed out, "Would they [OPEC] declare victory now and stop?

"No way: they're happy to see inventories continue to go down, to see prices of $70 or $80; in the end, it's about revenues, [and] the question is at what point do they become uncomfortable with higher prices?"

Jan Stuart, an oil economist at Cornerstone Macro LLC, agreed that "They are willingly over-tightening this market; it's not self-defeating if what you are looking for is a little extra money.

"If the idea is to get a ton of money in the door now, then they're probably doing the right thing."

All bets are that OPEC will announce that the cutbacks will continue: Bloomberg notes that oil ministers will gather in Jeddah on April 20 to focus on ways of prolonging cooperation: "That could include new inventory targets that extend the cuts, and laying the foundations for an alliance that will last for years; any recommendations this week would have to be ratified at the group's full meeting in June."

Last week, Bakheet Al-Rashidi, oil minister for Kuwait, told media that the liaison between OPEC and allied producers could last "indefinitely."