Opec and its allies may prolong production cuts after they expire in June if the world’s crude inventories remain excessive, Saudi Arabia’s Energy Minister said.
The curbs will be sustained if stockpiles are “still above the five-year average, if the markets are still not confident in the outlook, if we don’t see companies and investors feel good about the health of the global oil industry,” Khalid al-Falih said in a Bloomberg television interview in Washington.
“We want to signal to them that we’re going to do what it takes to bring the industry back to a healthy situation.”
The Organisation of Petroleum Exporting Countries will meet on May 25 to decide whether to continue its production cuts, aimed at ending a slump that battered the economies of energy exporters around the world. The strategy is moving global markets in the “right direction” and fundamentals have improved considerably, al-Falih said.
So far, Saudi Arabia has shouldered the bulk of Opec cuts, trimming February output to 10.011mn barrels a day, which is below the ceiling imposed by the agreement. Opec output in February was 1.39mn barrels a day lower than its reference level. Brent crude rose as much as 0.3% to $51.87 yesterday and traded at $51.81 as of 12:39 p.m. in Singapore.
But among the 11 non-members joining Opec in the accord, compliance is lagging. Led by Russia, the countries reduced their February output by 240,000 barrels a day from October-November levels, or 43% of their promised 558,000-barrel reduction, according to Bloomberg calculations using preliminary data from the agency.
Still, Opec’s partners are “fully committed” to cutting output, al-Falih said. He characterised any lags in compliance as par for the course: “Some are trying to iron out the process of controlling production, which they’ve never done before,” he said. “I believe in the sincerity of their effort.”
In the US, higher oil prices triggered by the Opec agreement have spurred investment in the shale industry, potentially signally another production boom that could undermine Opec’s goal of rebalancing the market.
“Certainly, I have made clear that the excessive production that I saw coming out of shale three, four years ago cannot be absorbed by the global market,” al-Falih said. “We will see what levels of production are. We hope they will be manageable.”
Another price crash also would bode ill for Saudi Aramco’s highly anticipated IPO, expected in 2018. The kingdom hasn’t decided yet where it will list the world’s biggest company, al-Falih said. Saudi Arabia has said that the oil giant is worth more than $2tn, more than twice what analysts and industry executives say it’s worth.
“The markets will ultimately determine the real value of Saudi Aramco,” al-Falih said. “All I can say is it’s a fantastic company.”
Oil stocks in the world’s richest countries stood at 3,025mn barrels in February, or about 297mn barrels above the five-year average, according to Bloomberg calculations based on International Energy Agency data.
To reduce the overhang to within the five-year average on time for Opec’s next meeting, inventories would need to drop at an unusually high rate — of more than 3mn barrels a day. With current supply and demand trends, Opec can hope for, at best, a reduction of about 500,000 barrels a day.
West Texas Intermediate, the US crude benchmark, last week fell below $50 a barrel for the first time this year amid worries about the pace of the stockpile reduction. Brent crude is trading at about $52 a barrel.
Opec and its allies agreed in December to reduce output by nearly 1.8mn barrels a day in the first half of the year to rebalance the market. So far, Opec has delivered nearly all the cutbacks it promised, mostly because Saudi Arabia has cut deeper than agreed. Non-Opec nations have been slower, however, so far delivering about a third of their agreed reductions. Russia has trimmed about half what it promised while Kazakhstan has actually boosted production.
Still, Opec and its partners are “fully committed” to curbing supply, al-Falih said. He characterised any lags in compliance as par for the course: “Some are trying to iron out the process of controlling production, which they’ve never done before,” he said. “I believe in the sincerity of their effort.”
“It looks impossible for total OECD company stocks on land to fall back by mid-year to the five-year average, which Opec has set as a key benchmark as to whether it should extend its deal,” oil consultants FGE told clients in a note.