FRACKERS ARE HEROES: Are OPEC’s Cuts Working?

The oil cartel OPEC and a coalition of non-member petrostates agreed nine months ago to reduce their collective production in an attempt to inflate oil prices. It’s been almost eight months since that group has put that plan into action, and there’s seven more months of output cuts in the works. So how well is this market intervention working?

It depends on how you look at it. From the price perspective, the price of oil is roughly $5 higher (an increase of more than 10 percent) than it was before OPEC & co. agreed to this strategy, but that sounds a lot less impressive when you consider that Brent crude is trading today at less than half of what it was three years ago.

One explanation for this as-yet underwhelming effect on the global oil market has to do with how diligently (or not, as the case may be) petrostates are adhering to the cuts they agreed to. OPEC’s production rose in July for the third consecutive month thanks to surging output from Libya and Nigeria, two countries that are in the process of rebounding from significant supply disruptions due to civil unrest in recent months and years. But as the FT notes, Saudi Arabia—the lynchpin of OPEC and of this entire production cut strategy—exceeded its own targeted output for the first time last month, according to outside observers. It’s going to be difficult for this plan to work if its undisputed leader makes a habit of exceeding its quota. . . .

OPEC and its ilk are still struggling to balance the books in this new era of cheap oil, and what meager price rebounds this coalition has so far produced are being undermined from both within (as we’ve seen lately with Saudi, Nigerian, and Libyan output increases) and without (American oil production is up 653,000 bpd in 2017). In today’s market, there’s still precious little to be excited about from a petrostate perspective, and that may be all you need to know to assess these production cuts.

Good.