Oil in Global Economy Series: OPEC cuts likely to fail to boost oil price thanks to USA

As the price of oil decline sharply over the last two months, triggering one of the sharpest sentiment reversals since the ‘Great Recession’ of 2008-09, the Organization of Petroleum Exporting Countries (OPEC) are once again discussing joint production cuts.

In November 2016, OPEC producers along with 10 non-OPEC countries led by Russia, agreed to deliver a production cut of almost 1.76 million barrels per day, which helped the price to recover from its $26 per barrel (WTI) in early 2016 to $76.6 per barrel two months ago. But in June, Saudi Arabia and some other countries within OPEC, despite protest from countries like Iran announced that OPEC would increase production to compensate for declining production in member countries like Venezuela, Nigeria.

Now, OPEC is back again discussing production cuts again as almost 35 percent price drop in two months spooked Arab producers.

However, this time, the OPEC is likely to struggle to contain the price decline if it moves alone, and more importantly, because of the United States, where oil production is rising rapidly. As the price started declining back in 2014, the U.S. production declined from 9.61 million barrels per day in the summer of 2015 to 8.43 million barrels per day by the summer of 2016. Since then, as the price recovered thanks to OPEC and Russia’s efforts, the production n rose from 8.43 million barrels per day to 11.7 million barrels per day, as of last week. That is more than 3 million barrels increase in just two years, which significantly dwarfs cuts achieved by OPEC group.  

Thanks to the USA, in the current geopolitical environment, Russia is no mood to subsidize U.S. production by cutting its own and it looks like that the U.S. production is set to remain elevated for some time now. Even if OPEC moves ahead with production cuts it would only help U.S. producers to produce more thanks to a higher price.