Oil: OPEC/Russia To Adjust Oil Production Cuts

For a few days, Brent Crude was trading over $80. Then news hit that Saudi Arabia and Russia were in discussions about lifting the production cuts. Brent prices reversed, falling to the $75 range.

CNN Money states:

Speaking during a panel discussion hosted by CNNMoney's Emerging Markets Editor John Defterios, Saudi energy minister Khalid Al-Falih said he was engaged in intensive discussions with Russia and other OPEC officials about how to balance the oil market . . . "Whether it's a million barrels [or] more or less, we think we'll have to wait until June before making that announcement," he said. Production increases would be gradual to avoid delivering a shock to the market, Al-Falih added.

As mentioned in the article, we have to remember that production cuts of 1.8 million were put into place in 2017 after oil prices fell to $26. The supply cuts were supposed to continue until the end of 2018, but then everything is subject to change. The two big impacts that are likely changing the thought process is: a.) sanctions on Iran and b.) the continued decline in Venezuelan oil production.

To me, the key statement by Saudi energy minister Khalid Al-Falih is the world "gradual."

Bloomberg added some additional facts:

“The market is now pricing in the possibility that OPEC is going to raise production,” Phil Flynn, an analyst at Price Futures Group in Chicago, said by phone. An 800,000 to 1 million barrel a day increase would “barely” offset the expected loss from Iran and Venezuela but “the market is taking that as a big increase.” . . . Saudi Arabia and Russia’s potential policy shift doesn’t materially change Goldman Sachs Group Inc.’s bullish oil outlook, the bank’s analysts including Damien Courvalin said, reiterating a forecast of Brent at $82.50 in the third quarter.

It should be noted that back in 2017, Goldman Sachs believed 2018 prices would be in the $60 range.

I previously noted that oil inventories were expected to contract by 1.3 million barrels a day in the second half of the year. At that time, the oil glut (oil supplies above the five year average) was 43 million barrels, which I'm guessing at this point in time has dropped. So Phil Flynn has a point: increasing production by 800,000 to 1 million barrels a day would just slowdown the decline in the oil supply. It wouldn't cause the oil inventory to increase. In fact, as Khalid Al-Falih states, the production increase would be gradual. It is possible that they'd just increase production somewhat inline with demand increases and any continued decline in Venezuelan/Iran output, allowing the 1.3 million decline in inventory to continue.