The Organization of Petroleum Exporting Countries (OPEC) is getting a first-class education in the law of supply and demand, i.e. when supply outstrips demand prices decline.
It has been a painful lesson. And it is not over.
In November 2014, OPEC member countries decided not to cut production even though there was clearly an oversupply of crude oil on the market. Prices dropped from almost $100 to $25 in a little over 12 months.
Realizing that something must be done about the surplus, OPEC oil ministers agreed to cut production 1.2 million barrels per day (b/d), and some other oil exporting countries who are not members of OPEC – Russia being one, agreeing to cut 300,000 b/d – said they would cut production, too.
However, OPEC’s first assessment of world markets showed that, despite attempts to cut output, the group is still pumping too much crude. It was revealed at an OPEC meeting of its committee that monitors production from each country in St. Petersburg, Russia on Monday that United Arab Emirates and Iraq have been slow to adhere to their quotas. Saudi Arabia and Kuwait have cut more than they pledged, and Saudi Arabia pledged to reduce its exports further to 6.6 million b/d. Nigeria also said it will limit production to 1.8 million b/d.
OPEC’s output exceeded demand in the first half of 2017, according to an OPEC analysis. Its production was 32.6 million b/d in June, which is higher than the 32.2 million a day OPEC expects will be needed in 2018.
Oil prices have slumped into a bear market on concerns that production cuts implemented by OPEC and Russia since the start of the year aren’t deep enough to clear a global glut, while U.S. shale-oil producers are gearing up to fill in any shortfall.
The report from OPEC’s Vienna-based research department indicates that OPEC was still over supplying world markets by about 700,000 barrels a day in the first half of this year.
The report indicates that deeper cuts must be made to eliminate the…