Analyst John Kemp opined that the Organization of Petroleum Exporting Oil and its non-member oil producer allies (OPEC+) already needs an exit strategy for its newest crude oil output cuts, taking the lessons from its past experiences.
OPEC has been known to have problems in being decisive regarding output and, eventually, oil pricings.
OPEC+ is no different, with oil prices war occurred in the past few months between Saudi Arabia and Russia which drove oil prices to historical new lows.
In 2009, 2017, and 2019, the group restrained production for too long and allowed oil prices to rise too high that they lost a significant market share to the US shale sector which then led to new downtrends in prices.
During the first shale boom (2012-2014), Saudi tried to keep prices above USD100/barrel and in the second shale boom (2017-2019) above USD70/barrel. As a result, the US shale producers seized almost all of the incremental global oil consumption in five of the last eight years.
OPEC+ was only able to recover the loss in market share or maintain it in 2015-2017.
OPEC seems to always be caught in the cycle of overproduction, price slump, OPEC cuts, inventory draws, unsustainable price rises, surging shale output, and renewed oversupply, and created massive volatility.
Kemp advised OPEC+ to moderate the cycle in this present, they need to aggressively and quickly react to prices’ fluctuations in the market.
Most importantly for Saudi Arabia, Kemp underlined that it needs to see draws in inventory and climbing prices before increasing its own output right before shale producers fill the supply gap in the market.
Both Saudi and Russia are required to avoid repeating their previous disagreement or volume war and start now in assessing the time and methods to exit the current output cut deal.
They have to communicate well in adjusting outputs in response to prices, to ensure the security of investments of shale companies and other oil producers. Both countries need to avoid the price trigger such as announcements on increasing productions.
Nevertheless, both Saudi and Russia would need good management work with another biggest producer, US shale producers, to identify a combination of price and supply which could be sustainable in recovering consumption.
