Saudi Arabia, OPEC’s dominant producer, will keep doing the heavy lifting as the cartel and its allies were all but forced to extend their effort to counter the U.S. shale boom into a fourth year.

In a meeting this past week, the Organization of Petroleum Exporting Countries and 10 nonmembers, including Russia, rubber-stamped the cartel’s earlier decision to continue production limits for another nine months. For all the expressions of unity, one country mattered more than the others.

Saudi Oil Minister Khalid Al-Falih used a press conference on Monday night to say the kingdom was willing to keep cutting more deeply than its quota requires.

“This is a commitment to reduce inventories, and whatever it takes for them to do it,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. The Saudis are likely to keep production at around 10 million barrels a day — below their target — and “if required after nine months, they will continue with the deal.”

Al-Falih, who back in 2016 suggested supply reductions by Saudi Arabia, Russia and other producers in the OPEC+ coalition would be needed for only six months, appears increasingly bogged down in a struggle to wrest control of the global oil market from the U.S. shale industry. He expects to win, but conceded it will take a long time.

“I have no doubt in my mind that U.S. shale will peak, plateau and then decline like every other basin in history,” Al-Falih told reporters at OPEC’s Vienna headquarters. “Until it does, I think it’s prudent for those of us who have a lot at stake, and also for us who want to protect the global economy and provide visibility going forward, to keep adjusting to it.”

OPEC and its allies could be in for a decadelong fight. U.S. shale output will keep growing until the early 2030s, according to estimates from Rystad Energy A/S, an Oslo, Norway-based consultant that has been a staunch believer in the American energy boom.

The long-term nature of Saudi Arabia’s commitment was also signaled by two other decisions made at this week’s meeting. First, making the cooperation with Russia and other countries in the OPEC+ coalition more formal by adopting a charter to govern the relationship. Second, Saudi Arabia proposed a more ambitious target to reduce global stockpiles.

Saudi Arabia said it would measure the surplus of crude inventories against the 2010-2014 average rather than the same measure over the last five years. That would mean draining an additional 160 million barrels from the world’s oil tanks, based on calculation by Bloomberg News. Russia promised to study the Saudi proposal.

“Inventories have gone out of our hands the last few months,” Al-Falih said “It’s unfortunate, but they did.”

The initial reaction to OPEC’s decision was modest, suggesting investors remain worried about the outlook for global oil demand during the rest of the year and into 2020. Brent crude was down 0.3% at $64.89 a barrel at 11:43 a.m. in London on Tuesday. That’s about 2.5% below the closing price on Friday, before the cuts extension was announced.

The decision to extend production curbs through next March comes as the International Energy Agency and other market watchers peg back forecasts for demand amid sluggish growth in China and India. But Al-Falih said concern about slowing oil demand was overdone, especially after China and the U.S. agreed on a trade war truce at the G-20 summit in Osaka, Japan.

Although the deal was adopted swiftly on Tuesday, talks between ministers on Monday weren’t without drama.

The OPEC members quickly settled on extending their output cuts, but the talks dragged on for hours longer than anticipated amid wrangling between Iran and other countries over the details of the charter enshrining the OPEC+ alliance.

Since OPEC joined forces in 2016 with other producers including Russia, Kazakhstan and Mexico, they have sought to establish an enduring basis for cooperation. But Iran has voiced unhappiness with the dominance that nonmember Russia — not to mention regional rival Saudi Arabia — exert over OPEC policy.

Iranian Oil Minister Bijan Namdar Zanganeh said the dispute was resolved by making sure the charter doesn’t change OPEC’s decision-making process, and giving national governments the right to approve the document.

Ministers are likely to insist the end is in sight, but based on experience, oil traders may be skeptical that the cuts will come to an end any time soon. In late 2016, the group announced the cuts would last just six months. Then in mid-2017, it prolonged the cuts by nine months, only to extend them by a further nine months at its next meeting.

With assistance from Bloomberg’s Julian Lee, Jack Farchy, Grant Smith, Salma El Wardany, Golnar Motevalli and Javier Blas.

(6) comments

MD1756

I wonder why the WTO doesn't do something about the collusion of production fixing that has the intent of fixing the prices of oil.

DickD

With all of the Arab countries and Russia benefiting from oil? Besides, even the U.S. oil drillers benefit and they do much of the drilling in the foreign countries too.https://www.taxpayer.net/energy-natural-resources/oil-and-gas-subsidies-overview1/ Taxpayer subsidies to the oil and gas industry have played a major role in U.S. energy policy since 1916. Two of the largest tax breaks, expensing of intangible drilling costs and the percentage depletion allowance, were enacted in 1916 and 1926, respectively and were designed to reduce production costs and encourage more exploration for oil and natural gas. [i]   In subsequent years, more and more tax breaks were added to the tax code to benefit the powerful oil and gas industry.  In the past decade, despite rising oil and gas profits legislators continue to provide the industry with new and expanded tax breaks and subsidies.Since 1950, the federal government has provided more than $160 billion in tax breaks and subsidies to the oil and gas industries (see Table 1). Table 1 shows the largest tax credits provided to the oil and gas industry over the past several decades. [ii] The table also includes royalty revenues that have already been lost from Gulf of Mexico deepwater oil and gas leases signed in 1998-1999. [iii] It is estimated that these leases will cost taxpayers an additional $6.4-$9.8 billion in lost revenue over the rest of their lifetime. [iv] Moreover, the Minerals Management Service is currently being sued by the Kerr-McGee Corporation, which alleges that MMS cannot include price thresholds in any Gulf of Mexico deepwater leases from 1996-2000; as of September 2008, MMS is appealing a lower court ruling in favor of Kerr-McGee. [v] GAO estimates that this lawsuit could cost taxpayers $16 to $39 billion in lost royalty revenues.[vi]In addition to the subsidies included in the table the oil and gas industry receives substantial profits from using the “Last-In, First-Out” inventory method, which allows companies to underestimate the value of their inventory for tax purposes.[vii] LIFO accounting is estimated to cost taxpayers over $4 billion in the next 10 years. [viii] 

MD1756

I know they get massive tax breaks, and the citizens don't get enough royalty from oil, coal, metals, etc. Additionally they don't pay the true costs of those sources of energy. That is why I just cringe when people complain about subsidizing green energy sources that help individuals generate energy from resources on their own property in a non or less polluting manner than big energy companies. I still think the production/price collusion should be addressed to the benefit of the people of the world.

DickD

The car industry sees the change coming, they are converting over to EV's.  Right now you can buy a Ford Escape, SE trim with turbo boost from Koons Ford, in  Falld Church, Va. for $18,015, on a car with list price of $28, 490.  (That does not include the processing fee, sales taxes and tags and title, add $3,000 for that.)

DickD

The Saudis should be ready for a long fight on oil.  No matter what they say, the U.S. oil production is scheduled to go up by 40%.  Add the electric cars that will flood the markets, in the next three years and a likely recession, there will be a inventory build that the world cannot and will not use.  The smartest thing the Saudis could do is to sell all of their oil now, for the best price they are likely to get for the next 20 years. Oil companies are still forecasting oil shortages in the near future.  But there predictions of the Electric Car (EV) is not what the EV industry is predicting. https://www.bloomberg.com/features/2016-ev-oil-crisis/

DickD

You can buy a 2019 Ford Escape, SUV, ES trim, list price $28,490, for $18,015, plus shipping, sale taxes, processing fees and tag and title, add $3,000 for them. The EV's are coming.

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