OPEC Production Cuts Could Get Harder Once This Happens

OPEC is extending its production cuts by an additional nine months. Here's what it will mean for the price of oil.

Motley Fool Staff
Motley Fool Staff
Jun 2, 2017 at 2:15PM
Energy, Materials, and Utilities

OPEC recently announced an extension to its production cut into March 2018.

In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman explain which countries are doing the cutting, what they're hoping to accomplish with this extension, why the price of oil actually fell the day this cut was announced, and what the market wants from OPEC.

A full transcript follows the video.

This video was recorded on May 25, 2017.

Sean O'Reilly: OPEC cut production again, Taylor! The first one didn't work so great. OPEC announced they were going to extend their production cut by nine months into March 2018. I can't believe that's only nine months away, now that I think about it. I thought that, it felt like we were just talking about the cut last November. Cuts are going to be shared more or less equally across the board, particularly between Saudi Arabia and Russia, who really, really want oil up. The best part about this is that oil is down a little bit right now. It gained $1-$2 over the last week?

Taylor Muckerman: Yeah, a couple weeks ago it was still in the high $40s, now it's in the low $50s. So, it's still up over the last few weeks.

O'Reilly: So, this is not a surprise so the price probably isn't going to change, because the market prices things in directly.

Muckerman: Yeah, everyone is saying, "Oh, they only cut for nine more months, we need OPEC to carry all the weight, wah."

O'Reilly: That's what I wanted to talk to you about. What does the market want? It seems to me, apparently the market wants Russia and Saudi Arabia to literally say, "Here's the deal, we're going to keep cutting production until oil is at $80."

Muckerman: I promise you this: If Saudi Aramco is a publicly traded company and folks own shares in that, they wouldn't be clamoring for OPEC to cut oil production.

O'Reilly: Oh, that's interesting!

Muckerman: Because it would be publicly traded, and investors would have a stake in it. They want OPEC to cut because those are companies they can't invest in, so they want oil to go up for the companies they do invest in, without the companies they invest in reducing their oil output to help out the market.

O'Reilly: Now, the other side of that coin is, there has to be a marginal utility curve where the production that gets cut is less than the loss and revenue that you get from the increased oil price.

Muckerman: Yeah. But they just continue to put pressure on OPEC to do all their dirty work for them. And they're not making more cuts, they're just extending cuts. People wanted either more cuts for nine months or same cuts for longer than nine months, and it's just not going to happen.

O'Reilly: I just can't believe it's not moving. I would be very depressed if I was Saudi Arabia right now.

Muckerman: To the upside, that's it's not moving up? Yeah, everyone is saying this has been baked in, because people have been talking about them extending cuts for the last few weeks. They just haven't been confirmed efforts that they would extend the cuts. And you still have Nigeria and Libya that are free from having to cut their production because internal strife has limited production over the years. You look at rig count activity in other OPEC countries. Since April of 2010, it's up and to the right.

O'Reilly: How much percentage-wise?

Muckerman: Almost triple, between the UAE, Kuwait, Qatar, and Algeria, the oil rig count has almost tripled from fall 2010 to April of this year.

O'Reilly: And Saudi Arabia is leading this, because I'm sure all the other OPEC members, you were talking about, U.S. investors want OPEC to cut.

Muckerman: Well, any investor in an oil company that isn't based in an OPEC nation that you can publicly trade once oil prices are up.

O'Reilly: Right. And you have to know all the smaller OPEC countries that you just mentioned are like, "Hi, Saudi Arabia, we know you want oil up because of your Aramco IPO, that you totally want to raise $200 billion through." 

Muckerman: Yeah, there's definitely some game theory going on.