VIENNA – An alliance of many of the world's biggest oil-producing nations extended their agreement to cut output for an additional nine months — an effort to support prices that will prove difficult in the face of growing production from the U.S.
Thursday's decision by the OPEC cartel — now at 14 members with the entry of Equatorial Guinea — and 10 other countries led by Russia, means that the reductions of 1.8 million barrels a day agreed on in November will stay in place until March.
Saudi Oil Minister Khalid A. Al-Falih, who presided over the meeting, said he expected that the extension should reduce high crude inventories to a level corresponding to "the five-year average by the end of the year."
Less oil on the market normally means higher value per barrel. But any uptick in prices may be modest and temporary.
The OPEC alliance faces competition from U.S. shale producers. Many have returned to the market since crude prices have risen from last year's lows to over $50 a barrel, and more are set to resume operations if crude prices go even higher.
That could increase supplies and drag down prices again.
Investors seemed to focus on that reality on Thursday, when they pushed the price of crude to levels seen before OPEC's meeting in November. The U.S. benchmark for crude was down $2.25 a barrel at $49.11.
The upshot is that the price of oil — and derived products like fuel — is unlikely to increase much in coming months. That will be welcome news to consumers and energy-hungry businesses worldwide but could continue to strain the budgets of some of the more economically-troubled oil-producing nations, like Venezuela and Brazil.
Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions, said that the countries that had agreed to the cut had complied by easing production but continued to export at high levels from existing inventories.
"This is significant in partially explaining why crude stocks ... have stayed so high," she said.
Al-Falih dismissed the market reaction on Thursday, noting that world economies are growing and continue to depend largely on crude as their lives' blood.
"I never worry about the daily reaction of the market," he told reporters.
The decision extends a cut of 1.2 million barrels a day by the Organization of the Petroleum Exporting Countries. Non-OPEC countries led by Russia chipped in with a further 600,000-barrel reduction.
The problem for OPEC is that while crude sits substantially below the highs around $100 a barrel reached in 2014, it is high enough to bring back into the market U.S. producers who eased back as prices tumbled last year. U.S. shale production requires a higher price to be profitable compared with traditional crude oil.
U.S. output since last year has increased by nearly a million barrels a day to a daily 9 million barrels. That already puts American producers in the league with oil giants Saudi Arabia and Russia and cuts further into OPEC's past ability to play a role in setting prices and supplies
More than 400 oil rigs are now working U.S. shale fields — an increase of more than 120 percent compared with a year ago. And U.S. producers are poised to expand more, even if prices tick upward only moderately as a result of the oil-cut extension by OPEC and its partners.
Commerzbank cited data from the U.S. Department of Energy saying U.S. production was roughly 540,000 barrels per day higher in mid-May than at the start of the year.
"This offsets nearly half of OPEC's production cuts," it noted.
With shale oil here to stay, OPEC officials on Thursday said they were reaching out to U.S. producers to coordinate actions, but acknowledged that their efforts were at the beginning stage.
"We have to break some barriers," said OPEC Secretary-General Mohammad Barkindo. He said "we broke bread" with shale producers at recent meetings in Houston and Vienna, adding, "we all belong in the same boat ...and with this breaking of the ice, we hope to develop this relationship further."
Al-Falih said it was important for shale oil producers, like those in the U.S., to pace their output. Too rapid a growth risks "potentially oversupplying the market and revisiting 2014" — a reference to the year when crude prices hit levels south of $40 a barrel.
At the same time Al-Falih indicated OPEC was in for the long run. "We will do whatever is necessary," he said. Holding out the possibility of a further extension in March, he said "we will cross that bridge when necessary."
The decision to maintain oil cuts may in fact have only kicked the can down the road until March. Crude prices are unlikely to rise substantially — and that means the era of windfall profits appears to be over for member nations, at least for now.
While analysts at research firm IHS Markit expect OPEC revenues to rise modestly this year after dropping from their peak of $1.2 trillion in 2012, "the total will be less than half the level of 2012, when prices were more than double current levels."