OPEC has announced that its existing production cuts will be extended for another nine months after the initial six-month period failed to clear global inventories.
The news disappointed many in the market who were hoping for deeper cuts, leading to an immediate drop in the oil price, although some see this as an overreaction.
Despite increasing production from some non-OPEC oil producers, most notably the US shale drillers, demand is expected to surpass supply while the cuts remain in place. Oil prices are then expected to rise later in the year as global inventories inevitably run down.
If the supply cuts are successful in diminishing global inventories, a Goldman Sachs report points to a risk of returning to oversupply once the deal expires. The report singles out the unbridled growth of US shale and Russia’s return to rising production levels. Indeed, the EIA expects US production to approach 10 million barrels a day in 2018, while Russia enjoyed record production levels just prior to participating in the OPEC production cuts.
This all comes in a climate where oil giants like Royal Dutch Shell – which also makes the Shell Tellus S2 M 46 hydraulic oil – and ExxonMobil have already cut or deferred upstream investment in response to low oil prices. Although some new projects are due to come online, all that is needed for an oversupply problem to arise again is for OPEC producers and their partners to return to their original production levels.
The report suggests OPEC could try to flip the market into backwardation in order to limit the shale drillers’ access to finance.