- By Robbie GramerRobbie Gramer is a staff writer at Foreign Policy. He writes for The Cable, FP’s real-time take on all things, well, foreign policy. Before he joined FP in 2016, he used to think in a tank, managing the NATO portfolio at the Atlantic Council for three years. He’s a graduate of American University’s School of International Service, where he studied international relations and European affairs. He has lived in both Washington and Brussels, though he grew up in Idaho and Oregon, so he’s a West Coaster at heart. When he’s not busy reporting, he’s probably busy starting three new books before he has finished the last one or planning a trip to a national park he hasn’t visited yet.
OPEC just can’t catch a break.
The Organization for Petroleum Exporting Countries on Thursday agreed to extend global production cuts for nine more months. Members were hoping the move would breathe life into a depressed oil market caused by a massive global supply glut. But curiously, it did the opposite.
After OPEC delegates announced the agreement during their meeting in Vienna, oil prices dropped sharply. Brent crude prices fell as much as $1.59 per barrel to $52.37, while West Texas Intermediate crude dropped to below $1.64 to $49.72. That’s a long fall from grace for OPEC members, who in 2008 were flying high with over $140 per barrel prices and saw $115 oil as recently as 2014.
The 12 OPEC members and 11 non-members agreed to extend production cuts by 1.8 million barrels per day during their meeting in Vienna. The agreement, first hashed out in January, was supposed to last only six months. But dogged by fierce competition from the U.S. shale boom and excess supply, they extended the cuts through March 2018.
Industry analysts say the latest price drop may be in part because everyone expected the announcement. The world’s two top oil producers, Saudi Arabia and Russia previewed Monday’s OPEC announcement when they agreed last week in advance to joint oil production cuts.
“A nine-month extension of the output cuts is already baked into prices,” Olivier Jakob of Swiss consultancy Petromatrix told CNBC. “This shows there’s not much more OPEC can do.”
Industry analysts say investors may also be wary of rising output in Nigeria and Libya — both are exempt from OPEC cuts as they grapple with their own internal conflicts. Iran, too, is exempted from sharing OPEC’s pain as it struggles to regain market share after years of sanctions on oil exports.
Despite the market’s lukewarm reaction to the news, Saudi energy and oil minister Khalid Al-Falih put on an optimistic face that the renewed commitment could finally drain the supply overhang that has been weighing on oil prices.
“Nine months with the same level of production that our member countries have been producing at is a very safe and almost certain option to do the trick,” he said, speaking from the OPEC meeting in Vienna.
But OPEC has yet to find a way to address the U.S. shale boom, which is chugging happily along despite historically low prices. “U.S. shale producers have demonstrated resilience and the ability to produce at a lower breakeven price than many observers, including Saudi and OPEC, had expected,” said Ellen Scholl, an energy expert at the Atlantic Council. “Thus, while OPEC may be limiting production, U.S. production has been holding stronger than many anticipated.”
Either way, U.S. production appears to check OPEC at every turn. If prices fall further, lean U.S. producers can still survive, but OPEC members who rely on oil revenues will face continued fiscal strains. And if prices go up, things just get easier for U.S. shale producers.
“A firmer oil price will, we expect, further support the U.S. tight oil industry into 2018,” said Ann-Louise Hittle of Wood Mackenzie, an energy consulting firm. That could prompt healthier investment in new rigs and drilling.
“Today’s decision in Vienna sends a signal of continued support for oil prices from OPEC which helps U.S. onshore drillers make plans.”
Photo credit: JOE KLAMAR/AFP/Getty Images