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Oil Production Cuts' Big Winners (And Losers): An Alternate View

By Ellen R. Wald, Ph.D.CommoditiesDec 06, 2017 05:15AM ET
Oil Production Cuts' Big Winners (And Losers): An Alternate View
By Ellen R. Wald, Ph.D.   |  Dec 06, 2017 05:15AM ET
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Yesterday, in a post written by Jesse Cohen,'s energy sector specialist, Cohen posited that there were two big winners and one big loser after last week's OPEC meeting in Vienna. In his view, US shale drillers and Russian oil giants came out ahead after the oil cut extensions were agreed to, while Saudi Arabia got the short end of the stick.

Not so says Dr. Ellen R. Wald, who analyzes the confluence of energy markets and geopolitics, including oil pricing, energy policy, alternative energies, OPEC and the political economy, and writes a weekly oil markets column for Here's her view:

Last week’s OPEC meeting concluded with the result many had forecast. OPEC’s producing countries agreed to extend their own oil production cuts past the March 2018 end date and then, during a meeting with their non-OPEC partners, agreed to extend all of the production cuts through to the end of 2018.

Saudi Arabia was clearly the big winner at this meeting, for several reasons. First, Saudi Arabia achieved its stated goal of extending the production cuts for the entirety of 2018. Other countries, like Russia, were skeptical about the need for such a long extension and had suggested a shorter extension of either 3 months or 6 months. In the end, however, Saudi oil minister Khalid al Falih was able to achieve a consensus in favor of Saudi Arabia’s desired position of 9 months.

The 9-month extension is especially positive for Saudi Arabia because even though Saudi Arabia has curbed its crude oil production and exports more than necessary, the Saudis have been increasing their exports of refined products. Most other OPEC countries lack the ability to export gasoline or diesel, not to mention the various specialty chemical products that are manufactured in Saudi Arabia’s sprawling petrochemical facilities.

Saudi Arabia is also very well positioned for 2018 compared to its OPEC counterparts. During the press conference, Al Falih said that several OPEC members revealed during the closed-door session that they anticipate further drops in production during 2018 due to natural decline in their fields. Saudi Arabia, however, has the spare capacity to increase its production by at least 2 million barrels per day. This means that as some producers fall behind, Saudi Arabia could increase its own production (Saudi Arabia is currently producing under its quota) without overshooting OPEC’s overall production target.

While Saudi Arabia came out of the OPEC and Non-OPEC meeting in an improved position, Russia’s Alexander Novak did not. Prior to the OPEC meeting, Novak faced the particularly challenging task of obtaining the support of Russia’s major oil companies. He failed to convince them to get behind a full 9-month extension of the OPEC deal. Some of the Russian oil CEOs told Novak that they actually intended to increase oil production in 2018 regardless of Novak’s decision. If Russia wants to keep production within its quota in 2018, it will be up to Novak to ensure that the companies do not overproduce.

In the end, Novak agreed to the Saudi position. At the press conference, he explained that Russian oil production trends lower during the first several months of the year anyway, so Russia would faithfully support a full extension of the deal as long as OPEC and non-OPEC parties agreed to review progress in June 2018. Novak may be hoping to promise the Russian companies that he can get out of the deal at the June meeting. However, the other participants will not agree with that view, because the official statement from last week’s meeting explains that in June 2018, OPEC and its non-OPEC participants will review only market conditions, not the deal itself.

Russia may very well cheat on its production quotas—it has previously failed to uphold its part in past deals with OPEC—but that will be a matter for Novak and al-Falih to address in the spring.

The verdict is mixed on how helpful the OPEC deal will be for U.S. shale producers. The OPEC decision means that U.S. oil producers know what to expect in from OPEC and Russia for at least the next 6 months. Over 50% of shale companies have already sold futures at over $50 per barrel. Last week’s deal helps American shale producers project their own finances a little more accurately.

For shale companies with the capital to spend on expansion, OPEC’s decision to continue the production cuts is particularly welcome. However, many shale oil producers are also facing scrutiny from investors who, after years of funding growth at the expense of profits, are now looking for returns on their investment.

If oil prices rise, service costs for these industries will rise as well, making it even harder for smaller companies to show profits. In the end, it is likely that large, well-capitalized companies like Pioneer (NYSE:PXD), Continental (NYSE:CLR) and Exxon (NYSE:XOM) will do well in shale under the current OPEC deal, and smaller companies may still find themselves struggling.

Oil Production Cuts' Big Winners (And Losers): An Alternate View

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Oil Production Cuts' Big Winners (And Losers): An Alternate View

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Comments (3)
Brad Smith
Brad Smith Dec 06, 2017 6:24PM ET
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Saudi Arabia has been actively attempting to diversify their economy away from oil for quite some time now. Read: its $2 trillion megafund for this very purpose. Their resilience will provide them some buffer against oil movements. Overall however, it looks like Saudi Arabia will concede some market share to other oil producers as a result of this. I don't believe the natural decline in the fields of other OPEC producers will be enough to make up for this.
Do Deikins
DoRight Dec 06, 2017 3:47PM ET
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Not sure I understand the difference between "review only market conditions, not the deal itself"?  Guess Novak does also.
farzad khaiqi
farzad khaiqi Dec 06, 2017 1:41PM ET
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On point and very well observation Miss Ellen R.Wald. Thank you!
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