When President Trump tweeted on Monday that oil prices were getting too high, prices dropped more than 3% by midday.
This was a small blip in what has actually been a very strong start for oil prices in 2019. In fact, according to the Wall Street Journal, oil prices are having “their best-ever start to a year.” Saudi Arabia responded to President Trump’s tweets, saying, “we are taking it easy,” and the Saudi oil minister, Khalid Al Falih, explained that the 25 countries participating in the OPEC and non-OPEC production cuts “are taking a very slow and measured approach.”
WTI price, 5-hourly
In truth, OPEC’s production is down slightly, but it isn’t because producers are taking a “measured approach.” What’s happening is that some producers are cutting much more than expected, while others are over-producing significantly. Looking at the aggregate gives the appearance of “slow and measured.” Looking at the countries in comparison, the production looks uneven.
In January, OPEC collectively cut production by 797,000 bpd. This was actually less than its target of 812,000 bpd. Most of the production cuts came from a single producer, Saudi Arabia, which cut its own production by 350,000 bpd. Most OPEC producers exceeded their quotas slightly, with Iraq over-producing by 157,000 bpd and Nigeria by 107,000 bpd. Production from Venezuela, Iran and Libya was also down, however these members are exempt from quotas.
Production from the non-OPEC producers participating in the production cuts is also uneven. Russia, by far the largest and most important no-OPEC producer participating, has cut production but not nearly as much as it committed to. Russian production rose in January, though Russian oil minister Alexander Novak says that Russia has cut its production by 47,000 bpd in February. This is still less than it agreed to in December 2018.
Meanwhile, Kazakhstan, one of the other major producers involved in the non-OPEC part of the deal, is essentially disregarding any commitments to cut production. Kazakhstan confirmed that its oil production hit record highs in 2018. Its major oil producing field, Kashagan, produced 380,000 bpd in January 2019, and the country plans to keep production at this level for at least the first half of 2019.
Saudi Arabia says it plans to cut its production again in March to 9.8 million bpd. It also intends to again reduce exports to the United States. This announcement sent oil prices climbing earlier in February and also caused banks, like Merrill Lynch, to forecast that Brent would average $70 per barrel in 2019.
Brent Crude, 5-hourly
The OPEC and non-OPEC production-cut deal was designed so that each producing nation would cut a relatively small percentage, but together the cut would be significant in the oil market. Instead, we now have a few producing nations over or under-producing by more than the prescribed percentage. If 100,000 bpd suddenly came on or off the market from one country, oil prices could plunge or spike.
For example, if Saudi Arabia increases production (given its newfound increased spare capacity), the market would fall. If a catastrophe were to occur in one country (e.g. the Niger Delta Avengers were to sabotage an oil pipeline) there would be fewer participating countries that could make up for that loss, because they are already overproducing. The current situation essentially leaves Saudi Arabia almost alone in a position to increase production. The OPEC/Non-OPEC agreement is off balance.
President Trump’s tweet was probably just a reaction to rising gasoline prices in the United States. U.S. gas prices have risen largely because of the country’s new sanctions on Venezuelan oil and the regularly-scheduled refinery maintenance season. (Gasoline prices typically rise as refineries go offline to perform maintenance and switch over to start producing summer-blend gasoline, a more expensive type of gasoline). However, the President’s tweet and Al Falih’s response to it demonstrate that the current OPEC/Non-OPEC agreement is not stabilizing the market.