OPEC And U.S. Production Shape Oil Market Dynamics

from the Dallas Fed

— this post authored by Soojin Jo and Justin J. Lee

In an effort to reduce record high global crude oil inventories, the Organization of the Petroleum Exporting Countries (OPEC) along with 11 non-OPEC countries implemented a six-month production cut on Jan. 1. For the past two months, Saudi Arabia and some other Persian Gulf states have reduced production by more than their pledged targets. However, global crude oil inventories have not shown any signs of significant drawdowns, and rising U.S. production threatens the effectiveness of OPEC cuts.

While the cuts may be extended into the second half of this year, it is not clear whether an extension would be sufficient to boost market prices much higher than what we have already seen.

Saudi Arabia Shoulders Majority of the Production Cuts

OPEC reported that its agreement was successfully implemented in January and February, with overall production falling below its targeted level. However, the large decline in production was mainly driven by the Gulf states – Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. Particularly, Saudi Arabia is estimated to have reduced its production by more than its pledged target. Excluding Saudi Arabia, OPEC achieved 70 percent of its targeted cuts (Chart 1).

Moreover, OPEC members not bound to production cuts, namely Iran, Libya and Nigeria, offset the decline from the rest of OPEC by about a quarter million barrels per day (mb/d), consequently benefiting from higher prices. Due to lack of data, it is difficult to gauge whether non-OPEC countries are complying with their planned cuts. The International Energy Agency (IEA) estimates that non-OPEC countries have implemented only 37 percent of their promised cuts so far.

No Signs of Inventory Draws Yet

Available inventory estimates so far do not point to drawdowns, notwithstanding the large decline in crude oil production reported by OPEC. Recent weekly estimates of U.S. commercial crude oil inventories are at their highest levels since 1986 (Chart 2). Most of the increase in inventories so far this year is due to higher imports, particularly from OPEC.