Opec, Russia find reasons to keep cutting output after hitting goal

[LONDON] The oil stockpile surplus that's weighed on prices for three years is all but gone, but instead of celebrating victory some of the world's largest producers are finding reasons to continue cutting output.

Opec and Russia's historic agreement has achieved impressive results, wiping out 97 per cent of the targeted inventory surplus. Still, the curbs should continue because another important goal - boosting investment in oil and gas production - remains far out of reach, said Saudi energy minister Khalid Al-Falih. There's nothing to fear from prices rising even further from their current three-year high, he said.

His most important ally, Russian counterpart Alexander Novak, agreed there's no obligation to stop just because the pact's initial goal - stockpiles back in line with the five-year average - is at hand.

"We have our targets, but there's no strict formula under which we would decide: 'Well, we've reached zero, so we are done'," Mr Novak told reporters at the opening session of the group's meeting in Jeddah, Saudi Arabia on Friday.

Crude has surged to a three-year high and the glut that triggered the deepest oil-industry downturn in a generation is all but gone. Yet Opec's choke-hold on its own production is only getting tighter.

As oil ministers gathered in the Saudi city that neighbours Mecca for the meeting of the Joint Ministerial Monitoring Committee, the US$80 a barrel the kingdom desires was inching closer.

Energy ministers didn't make any new recommendations or adjust their targets in Jeddah, according to people familiar with the matter. Still, they did give a strong signal of their intentions after more than a year of production cuts and rising prices. Based on recent market data, they would have some justification in declaring victory and phasing out their supply deal, but all indications were that they'll keep on going at least until the end of 2018.

While soaring US shale production remains a nagging concern, the key players appear to be more fixated on the immediate benefits of high crude prices. Saudi Arabia needs to cover weighty domestic spending and attract investors to a partial sale of its state oil company, Aramco. Russia is relishing its new role as a major Middle East power broker, while also enjoying bigger financial gains than anyone from the accord.

"Russia is keeping all options open and Saudi Arabia is talking about a 2019 extension," UBS Group AG analyst Giovanni Staunovo said by email.

"Status quo for the time being is still the best choice," although the outcome of the group's next meeting in June will depend on inventory and production levels.

EASING OPTION

Russian minister Novak wouldn't rule out some easing of the production cuts this year, but said it would depend entirely on the situation in the market. For now, the group is cutting ever deeper, and Saudi Arabia's Mr Al-Falih chided nations that haven't been implementing their fair share of the curbs at the opening session of the Jeddah talks.

Overall, Opec and its allies cut 45 per cent to 49 per cent deeper than the agreed 1.8 million barrels a day in March, ministers said. That's the biggest reduction ever and compares with 38 per cent over-compliance in February.

Much of those additional reductions weren't intentional, according to the International Energy Agency. An economic crisis and "chronic mismanagement" dragged Venezuela's output to a multi-decade low, while Angola lost production from aging fields.

Others were temporary, such as field maintenance in Algeria. The cuts may keep getting deeper amid a growing likelihood that US President Donald Trump will reimpose sanctions on Iran.

Yet, for all the signs of a significantly tighter market, ministers signalled the cuts would continue. Saudi minister Mr Al-Falih in particular gave a strong indication that he thought higher prices wouldn't be a bad thing. Every year the world needs to develop new daily production capacity of about 4 million to 5 million barrels, but that's not happening right now, he said.

"There is the capacity for higher prices" without hurting demand, Mr Al-Falih said. "We have seen prices significantly higher in the past, twice as much as where we are today" and the global economy has the capacity to absorb them.

BLOOMBERG