Oil Cut Impact 'Disproportionally Limited'
OPEC's March figures revealed that the cartel and non-OPEC parties to the output cut deal have once again improved their compliance, meeting 98 percent of monthly obligations, compared with 86 percent when the agreement came into effect in January. Nevertheless, the price of Brent crude dipped to a 5-month low of under $47 per barrel earlier in the day after a month-long decline.
"Irrespective, achieving 98% of the cuts is of course impressive in terms of discipline, but it has been not that effective in terms of putting a sustainable upward pressure on the oil price," Dr. Carole Nakhle, Director at Crystol Energy, told Sputnik.
As oil prices still haven't reached OPEC’s target, the desired healthy range of $55-60 per barrel, the cut deal is likely to be extended beyond June, she argued.
"There is now a consensus within OPEC and the market in general that the agreement should be extended if it was to achieve a higher oil price range since the impact of the Dec 2016 deal has been disappointedly limited," Nakhle added.
US Shale Factor Depresses Prices
However, even the extension of the OPEC agreement by another six months until the end of 2017 would not lift oil prices above $60 per barrel due to a number of limiting factors, including the rising production of shale oil in the United States, which increased to 9.29 million barrels per day last week, the highest level since August 2015, experts warned.
"I think the agreement should be extended. It might be difficult to boost prices above $60 per barrel, but could move prices back to the $50-60 per barrel range. The most significant factor is obviously the shale oil production from the US," Xiaoyi Mu, Senior Lecturer in Energy Economics at the Center for Energy, Petroleum and Mineral Law and Policy, told Sputnik.
In turn, Nakhle said the effectiveness of the extension depends significantly on a total of three more limiting factors.
"The same factors that affected that outcome will continue to determine the effectiveness of the deal — namely shale production, conventional oil production, demand growth, and inventories among others. These are all moving parts," the Crystol Energy CEO explained.
Although the efforts of major oil producers are limited by record levels of US crude output, the increase in global oil demand encouraged by the OPEC oil cap is helping to stabilize the oil market, Mu argued.
"If the cut by OPEC and Russia was offset by increased production in the US, the net effect will be nullified although demand increase will still help to balance the market," Xiaoyi Mu said.
Russian Leverage
In theory, Russia, as the first oil producer to have fully met its obligations of cutting production by around 300,000 barrels per day, could inspire and lead other countries to follow suit and maximize their implementation of the deal. However, this scenario may also meet several obstacles, according to Nakhle.
"It is not about inspiration but about ability to do so technically speaking and more importantly political will. Each country is different especially when it comes to domestic economic and social needs as well as political agenda. Besides, having 'free riders' has been a common problem facing OPEC and countries who allied with the organization," the energy expert warned.
Nevertheless, using its influence on the energy market as the largest crude oil exporter outside OPEC is in Russia’s interest, Mu concluded.
The next meeting of OPEC will take place on May 25 in Vienna, which will be preceded by the meeting of the cuts monitoring committee, co-chaired by Kuwait and Russia, to discuss the extension of the cuts.
