OPEC Has Hinted at Cutting Oil Production, But Don’t Get Your Hopes Up

A cutback in production from OPEC nations could help the oil market in Texas. But here’s three reasons why that probably won’t happen right now.

By Alain StephensFebruary 15, 2016 11:54 am| ,

As oil prices continue to plummet, companies have been forced to lay off thousands of employees.

One of the big reasons for the drop in prices is that there’s just too much of it on the market. Now, one of the biggest players says it may be ready to cap how much oil it pours into the marketplace. Rumors that the Organization of Petroleum Exporting Countries – commonly known as OPEC – may be ready to trim back production caused a 10 percent spike in the price of crude on Friday.

But some say “don’t hold your breath.” One of those people is Matt Smith. He’s energy analyst for ClipperData, as a well as a contributing writer for the Houston Chronicle’s Fuel Fix blog. Smith says there’s three reasons why a production slowdown from OPEC nations isn’t likely. Number one: their market flooding tactics seem to be working in their favor.

“When prices were at their high in mid 2014, above $100 a barrel, we had this situation where OPEC was controlling the market. But they realized they were losing control because of a flood of production from elsewhere, specifically the U.S.,” Smith says. “When they met in November of 2014, they decided to basically let market forces take their course and decided to just flood the market with oil and so what we’ve had is oversupply in the market since then.”

A second reason, Smith says, is that production from OPEC nations is actually set to increase over the next year and beyond. Part of the reason for that is a new player – Iran – is getting back in the game.

“We saw Saudi Arabia increasing production last year, we’ve seen Iraq as well seeing record production,” Smith says. “And then the other piece of the puzzle is Iran coming back. We saw their production really stymied in the past few years, essentially because of sanctions placed on them. The sanctions have now been lifted, and we’re going to see a flood of oil coming to the market from them.”

And while OPEC production is still going strong, production elsewhere is falling. On Friday, a small Norwegian oil field in the North Sea halted production. Smith says that sends the message to OPEC that their strategies are working.

“Even though it was a very small amount, it was very symbolic because it’s showing that, not only is U.S. production being hit, but other areas of the world as well,” Smith says. “So, really, there are a number of different signs here that OPEC’s tactics really are working.”

Listen to the full interview in the audio player above.