Saudi Arabia is reportedly abiding by its agreement to cut oil production.
OPEC and key non-OPEC members agreed in November to cut production by 1.2 million barrels per day to reduce the global oversupply. According to The Wall Street Journal, the kingdom has cut its production by at least 486,000 barrels per day to 10.058 million.
History shows that this kind of compliance rarely lasts.
“Ninety per cent plus of the time, OPEC produces above their quota,” said Larry Adam, the chief investment officer for the Americas at Deutsche Bank Wealth Management, at a press event on Wednesday.
Adam sees West Texas Intermediate crude oil — the US benchmark of prices — rising only to as high as $58 per barrel this year. The OPEC members who agreed to reduce production for the first time in eight years would probably want oil higher than that. However, they would need to have fewer cheat days this time, as the chart below shows:
“That deal was consummated in the historically weak demand period for energy,” Adam said. “Let’s see what happens when all of a sudden you get to the spring, when driving starts to take place in the United States … let’s see how closely they abide by this agreement.”
Adam noted that the deal is not indefinite; it’s valid for six months, after which an extension will be discussed.
Even if OPEC abides by its agreement and keeps output low, US shale producers may keep global oil inventories high.
“The US has truly become a swing producer of oil, and I think that’s going to keep oil from going significantly higher than that $50 per barrel level,” Adam said. He estimated that the break even oil price for US producers — at which they earn zero profits and it’s still financially viable to produce — has fallen from around $70 to $45 per barrel.
On Thursday, West Texas Intermediate crude oil futures settled at $53.76 per barrel. On Tuesday, WTI hit the highest level in 18 months near $55.24 per barrel.
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