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OPEC on Verge of Collapse; Asks US to Decrease Production (But No…)

OPEC on Verge of Collapse; Asks US to Decrease Production (But No…)

Last December, OPEC and allied oil producers agreed to cut production by 1.8 million bpd in a desperate attempt to shrink global supply and rebalance the market. 

The effort began on January 1st, 2017 and was scheduled to last for 6 months. As OPEC’s biggest producer, Saudi Arabia agreed to cut production by a staggering 486,000 barrels per day (about 5% of its total production).

OPEC and its allies will reconvene on May 25th. We expect they will announce an extension of the original deal.

“Based on consultations that I’ve had with participating members, I am confident the agreement will be extended into the second half of the year and possibly beyond,” said Saudi Energy Minister Khalid al-Falih.

OPEC is also begging other oil producers to cut production in order to help rebalance the market and drive prices up. 

Balancing the market will “require the collective efforts of all oil producers,” stated OPEC in its monthly report. This should be done “not only for the benefit of the individual countries, but also for the general prosperity of the world economy.” 

OPEC blames the oversupply on the US shale industry, which has continued to increase production in spite of low prices. 

American shale producers were not part of last year’s deal, and their increasing production levels have made it impossible for OPEC to keep prices between $50 and $60 per barrel.  

US producers, who were forced to become more efficient after OPEC ramped up production in 2014 in an attempt to drive higher-cost producers out of business, can continue to make money as long as prices stay higher than $40 per barrel. 

“Oil prices have gained support but global inventories remain high,” reports Reuters. In recent months, prices have hovered between $47 and $54.

“I think [OPEC] are now acutely aware that they don’t have the kind of influence they used to have 10 years ago, and that shale is now the swing producer in the market,” says Capital Economics commodities economist Tom Pugh. 

In addition to extended production cuts by producers in the Middle East, here are some more factors that could influence the oil market in the near future:

• Growing Chinese economy 

• India’s decision to cut oil imports from Iran by 25%

• President Trump’s reach for energy independence 

• President Trump’s policies on drilling and fracking 

Author’s Note: Saudi Arabia and the OPEC nations tried to squeeze US shale out of the market, but they failed. Now they face competitors with more efficient technology and reduced production costs. 

Saudi Arabia has very little in the way of productivity other than oil production. Like Venezuela, SA could be another chilling example of a socialist economy that eventually destroys itself.

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