Even if there had been some agreement last week at the Doha meeting of oil-producing countries, it would not have made any significant difference in global production totals. At best production would have been frozen at near-record levels. As it is, an International Energy Agency (IEA) expert told CNBC on Friday that the world’s two largest producers, Russia and Saudi Arabia, are expected to pump “as much oil as possible.”
The result should be no surprise. Russia has no choice and the Saudis already have invested billions in producing at a high level in order to drive out high-cost producers. And the Saudi strategy has been working, so there really was no reason for the country to change its game plan.
Observers expect more discussion of a freeze or cut at the June 2 meeting of OPEC oil ministers, and that is nearly certain to raise hopes that supplies will be curtailed.
The IEA’s Neil Atkinson told CNBC:
In the post-Doha world, when we’re still in what is essentially a free market for oil, they (the Russians) will pump as much oil out as the market will absorb and the Saudis have said much the same thing. We’re back to where we were before Doha where people produce what they can, sell what they can for whatever price they can achieve and the market takes care of the surpluses in time.
Atkinson also pointed out that even though Russia indicated a willingness to freeze production, the country was “actually pumping up production anyway.”
U.S. production is pegged by the IEA to drop by as much as 500,000 barrels a day year over year in 2016. The catch, according to Atkinson, is that although U.S. production declined quickly, it could rise just as quickly.
And even though the Saudis are estimated to have about 2 million barrels a day in spare (unused) capacity, U.S. producers are the “most interesting … because [the U.S.] is so volatile and dynamic and that holds the key in many respects to the rebalancing of the market.”
West Texas Intermediate crude traded up about 1.3% Friday morning to $43.73, a barrel after closing on Thursday at $43.18. The January 2017 futures price is $46.41 a barrel.
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