When OPEC and Russia meet this weekend to review their strategy to clear an excess of global oil, they will face an unusual problem: To be working too well
As production cuts, coupled with strong global demand, tighten the market, oil prices have risen to a three-year high of close to $ 70 a barrel. That prompted warnings, from Iran's Oil Minister to Goldman Sachs Group Inc., of a further increase in US production, ruining all of OPEC's hard work.
"The big concern is prices: are they worried about them? Prices go up too fast?" Said Mike Wittner, head of oil market research at Societe Generale SA in New York. "There are many reasons why you would be concerned, but the top of the list is: how will American production respond?"
With much surplus of oil still, ministers of United Arab Emirates, Iraq and  Kuwait insists that it is not necessary to change the strategy and that the cartel will maintain its plan to restrict production during the rest of the year . However, the price increase means that delegates meeting in the Omani capital of Muscat face greater urgency to decide how to remove the obstacles.
"Getting too much above $ 70" can stimulate new supply and affect the economy, Jeff Currie, head of commodities research at Goldman Sachs, said in a television interview. "OPEC members do not want to see that."
Fierce competitors for decades, the Organization of Petroleum Exporting Countries and Russia joined forces in late 2016 against the threat posed by a boom in US oil shale oil. UU., That had flooded the markets and sent prices falling. To compensate for the US bonanza, OPEC and Russia assembled a coalition of 24 nations that would cut their own production.
For much of 2017, they had problems, as global inventories remained swollen and prices depressed. But the strategy gained momentum in the second half of the year as strong demand and supply threats from the Persian Gulf to the North Sea helped deplete storage tanks.
Prices responded, with Brent crude futures climbing to $ 70.05 on January 11. the highest since December 2014. While this gives the oil-producing economies much needed relief, it also presents them with worrying consequences. Driven by new investments, the production of EE. UU It could surpass 11 million barrels per day next year, surpassing both Saudi and Russian production, according to the forecasts of the US government. UU That compares with an estimated 9.3 million per day for 2017.
"There is an unintended consequence of this higher price," said Ed Morse, head of commodities research at Citigroup Inc. "OPEC fears not only the response from slate, but from deep water and oil sands of Canada ".
That said, the growing demand for crude will help absorb some of the additional production. World consumption will expand by about 1.5 million barrels per day this year, said OPEC Secretary General Mohammad Barkindo earlier this month.
Producers will formally review their agreement in June and may begin to reduce it in the second half of the year, said Citi's Morse and Socgen & # 39; s Wittner. Saudi Arabia and Russia, the largest producers in the pact, have repeatedly emphasized that when the time comes to end the deal, it will be done gradually.
Meanwhile, it is likely that the pressure to change the strategy will decrease in the coming weeks as oil prices retreat, the two banks predict. Crude futures will slide along with a pause in seasonal demand as the need for winter fuels decreases and hedge funds take profits from the recent rally.
"For now, with very temporary price strength, I think that OPEC will say that we are on track to rebalance the market and move forward," said Morse. But that resolution may not last all year. "There could be an agreement to increase production during the summer."