Oil Output Cut Restores Balance to its Markets

OPEC decided to reduce production by 500,000 barrels a day (bpd), effective February 1, thus the current output will be 25.8 million bpd from 26.3 million bpd. The decision was arithmetical in every sense of the word. The organization took into account the cost of each barrel of crude oil, whether directly consumed or from commercial or strategic stocks.

OPEC estimated a surplus of 500,000-700,000 barrels in oil markets at present. A large part of this surplus is attributed to the fact that some member States do not commit to their output quota, as only 75-80% of the organization members that are committed to their respective quotas, hence the surplus in oil markets.

The organization’s decision was thus correct. Despite the pressure exerted from oil-consuming countries and from the International Energy Agency (IEA) to avoid any cut in production and postpone the decision to late winter, it forged ahead and reduced thoroughly studied quantities, which make the surplus on the markets. It also decided to maintain quantities sufficient for more than 55 days for daily consumption of oil in major industrial countries. This means that there are sufficient quantities in anticipation of abrupt increases or consumptions resulting from severe cold and low temperature under the seasonal rate of this period. Meanwhile, the organization is also able to pump and produce additional quantities of crude oil, if necessary, as OPEC has quantities ranging between 3-5 million barrels of excess production capacity of crude oil, equivalent to almost twice the quantities of this period last year.

OPEC also took into account possible decline in oil prices by the end of the first quarter of this year, because of weak growth and global demand for next year, especially with the second quarter. For fear of sharp declines in oil prices that may reach $50 per barrel, the organization took this precautionary measure to maintain reasonable oil rates for the future, and keep the $60 oil rate for the American crude, which is equivalent to almost $55 per barrel of the new OPEC Reference Basket (ORB), which is appropriate for the current phase, where there are factors of maintaining reasonable growth that are not harmful to the world’s economic growth as a whole. The new ORB rate is acceptable by the oil-consuming countries for the current phase.

Dar Al Hayat