Energies –
I’ve noted for a while now that the market has pretty much baked in an extension of the OPEC production cuts beyond this month and I wondered aloud how OPEC was hoping to stir up added price gains considering this was priced in. This morning we see the next phase of this effort, with both Saudi and Russian officials saying the production cuts could be extended beyond this year. OPEC is now essentially trying to keep these production cuts “open-ended” in an effort to support prices, but as you can see from looking at the quotes this morning the market seems relatively unimpressed. For starters, there is the question of how effective this will be considering production is likely to increase in Nigeria and Libya from this point forward. Additionally, Iran would seem unlikely to be willing to continue with these restrictions as they continually cite goals to increase their production capacity. On top of that, Kazakhstan hasn’t even really put in much effort to stick to their production cut agreement and most expect production to expand there as well.
The financial state of the Saudi government is also in question. How much longer can the government continue to keep this up? Note the chart below (source:Bloomberg), showing that despite the gains in price since the production cut agreement went into effect, the Saudis are still seeing lower revenues due to lost market share. Mix in the fact that prices remain in a range that allows for expansion of US shale production, and this doesn’t seem like a winning scenario for the Saudis.
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