Friday May 29th, 2020 3:27PM

OPEC, allies extend production cut through 2018

By The Associated Press
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VIENNA (AP) — The OPEC cartel and a group of allied oil-producing nations agreed Thursday to extend crude output cuts until the end of next year, continuing a policy that led to a significant rise in the price of oil over the past year.

At the same time, the 24-nation alliance led by OPEC member Saudi Arabia and Russia gave notice that it stands ready to revisit the move if price increases bring U.S. shale operators — who suspended operations while crude was cheap — rushing back into the market.

"We are going to be agile, depending on how events unfold," Saudi Arabian oil minister Khalid Al-Falih told reporters. Announcing the extension decision after a day of meetings, he declared, "it's been a great day."

The success of the reduced output strategy has been reflected by crude's rise. Benchmark oil prices are now close to $60 a barrel, depending on the grades, up almost 20 percent from a year ago. On Thursday, the U.S. contract was trading at $57.08 a barrel, down 22 cents on the day.

That partly reflects a rise in global economic growth since last year. But it also has been attributed to the OPEC-led decision to limit production, renewing the cartel's reputation as a major player in controlling the oil market.

After decades of being a dominant force in determining supplies and prices, OPEC's role as a key regulator started fading in recent years, as U.S. shale producers started pumping up their output. That led to oversupply and a steep fall in prices from over $100 to below $40 a barrel by last year, leading to the decision to join key non-OPEC nations and jointly pump less crude.

But the strategy of continued cuts to drive up prices may not be sustainable over the longer run, and OPEC may yet see its influence wane again. With prices now at two-year highs, U.S. producers who mothballed operations when oil was cheap are coming back into the market in force.

U.S. oil producers need relatively higher market prices to break even than, say, Saudi Arabia. So the recent rise is encouraging more to start pumping again.

U .S. crude oil production already has grown by 15 percent since last year to nearly 10 million barrels per day, just behind Russia and Saudi Arabia. The International Energy Agency expects the United States to become the biggest net exporter by the end of the 2020s.

The extra crude is welcome for now, with the global economy booming. But at some point, the balance could again tip from relatively tight supplies to an oversupply, resulting in price drops.

Jan Edelmann, an analyst at Germany's HSH Nordbank, said not only the United States, but Brazil, China and other nations "could have increased incentive at the present price environment to increase their (oil) output."

While the prices of $100 a barrel last seen a little over three years ago appear gone, Saudi Arabia's Al-Falih was mindful to address the perception those rates evoked: that OPEC is interested only in cashing in on pricey crude.

"We are not looking to gouge the market with higher prices," he said, arguing that crude's value had to recover from previous lows to "create a market that is conducive to investment" and OPEC members drilling for more oil.

The extension agreement represented a rare consensus between OPEC kingpin Saudi Arabia and Iran. Jockeying for Middle East dominance between the two countries has led to disarray in the past. The tensions have spiked in recent months, with the geopolitical struggle potentially exacerbating different positions on oil.

The Saudis came to the OPEC meetings favoring continued cuts, but Iran wants greater market share as it claws its way back from the more than a decade of economic sanctions that were lifted as part of its 2015 nuclear deal with six world powers.

Russian Energy Minister Alexander Novak, whose country is a key Iran backer, made a comment that could upset Tehran and endanger the tenuous Saudi-Iran balancing act at future OPEC meetings.

Novak said the relationship between Moscow and Riyadh "is developing faster than ever" on oil issues, as well as on other projects.

  • Associated Categories: Associated Press (AP), AP World News, AP Business, AP Business - Economy, AP Business - Financial Markets, AP Business - Industries, AP Business - Utilities
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