The Organization of Petroleum Exporting Countries (OPEC) may be on the brink of coordinating its first production cut since the 2008 global financial crisis. If the oil cartel makes its play to boost prices, consumers will likely feel the impact.
OPEC’s 14 members are scheduled to meet in Vienna on Nov. 30 to decide whether to reduce their oil output, which hit a new record of 33.6 billion barrels per day in October. The group announced framework for a deal in September, saying it would pursue a production target of 32.5 million to 33 million barrels of crude a day. Officials anticipated working out the details ahead of Wednesday’s meeting, but many obstacles remain.
If the meeting results in production cuts, Goldman Sachs (NYSE:GS) believes it could prove to be “one of the most important events for the oil market” since the North American shale oil boom, analysts at the investment bank wrote in a research note.
The shale revolution was the primary catalyst for the sharp decline in oil and natural gas prices beginning in 2014. As a result, drivers saw the lowest prices at the pump in more than a decade, and homeowners benefited from cheaper heating oil.
The national average for a gallon of regular gasoline is $2.12, according to GasBuddy.com. Exactly four years ago, pump prices averaged $3.41 a gallon. Gregg Laskoski, senior petroleum analyst for GasBuddy, noted that oil traders seem doubtful that a meaningful decision from OPEC is on the horizon. He added that gasoline prices recorded a monthly gain in December just once in the last four years.
Consumers also have saved on other fuels like heating oil, which dropped from a February 2014 peak of $4.24 a gallon to about $2.37 a gallon in October, the most recent month of data from the U.S. Energy Information Administration.
Oil prices swung higher on Monday in anticipation of the meeting, as traders tried to read the tea leaves and predict if OPEC will, in fact, cut production.
But consumers shouldn’t be too concerned that fuel savings won’t last, given the latest reports and analyst predictions. Multiple reports late Monday indicated that OPEC officials closed the day without making any progress in their talks.
Saudi Arabia, OPEC’s largest member, is reportedly backing a plan to make steep cuts. However, Iran and Russia are wildcards in the negotiations. Iran has been intent on keeping its oil flowing ever since the U.S. and European Union lifted economic sanctions on the country early this year. Some members also want Russia, the largest oil producer outside of OPEC, to be part of a coordinated effort to limit drilling activity. So far, Russia has expressed a willingness to only freeze production at current levels, rather than partake in a coordinated pullback.
Meanwhile, Libya and Nigeria are exempt from any broad agreement for cuts hammered out in Vienna, and Iraq has suggested that it should also be exempt considering its ongoing fight against ISIS.
The odds of a deal are fairly uncertain. Either way, analysts are questioning exactly how much an OPEC supply cut will actually impact the global market.
OPEC has flooded the market with crude in an attempt to keep pace with U.S. companies that struck gold in shale plays, such as the Bakken in North Dakota. The group has produced oil at record highs in recent months, so anything but a significant reduction isn’t expected to make more than a dent.
Consider that OPEC’s September framework called for a cut of 200,000 to 700,000 barrels a day based on production levels at that time, far below OPEC’s last cut of 4.2 million barrels a day in 2008. Also, the initial production target reflects at least a 2.2% increase over OPEC’s average 2015 output of 31.8 million barrels a day.
Even if OPEC makes a big cut, a subsequent rebound in oil prices could encourage drillers, particularly American shale producers, to reawaken rigs that were idled during the market’s prolonged slump. There are 593 active rigs in the U.S., down 151 from last year, according to the latest tally from Baker Hughes (NYSE:BHI).
Damien Courvalin, head of energy commodities research at Goldman Sachs, believes any move to limit the oil glut in the short term won’t alter the industry’s general course. In other words, the flow of oil from shale and other sources will continue to keep a lid on prices. Goldman Sachs is forecasting peak Brent prices of $55 a barrel during the first half of 2017, about 13% higher than Monday’s rate.
“We continue to think that the structural shift in oil enabled by U.S. shale will keep oil prices lower for longer,” Courvalin wrote in a note to clients, adding that shale firms can quickly ramp up production if prices permit. “At $55/bbl, we would also expect greater spending on existing producing assets elsewhere, another short-cycle source of supply.”
U.S. oil futures settled 2.2% higher at $47.08 a barrel on Monday. West Texas Intermediate crude, which touched a 52-week high of $51.60 a barrel in October, has retreated in four of the past five weeks.