Why is OPEC cutting crude supply?

As I understand it, “trial balloon” is a term used for a thought or action before being respectively verbalized to a nervous audience, or enacted upon the now even more nervous audience last seen stampeding toward the exits.

Come on now! That must take the prize in the Grouchallic diaries for the most anemic, verging on amoebic, intro that loyal readers of the En-Pro Weekly Energy Report have even attempted to understand.

Many things in the energy sector are difficult to understand, and so I join you in the congregation of the confused.

On an international level, you have likely heard by now that OPEC (sorry, I mean the Saudis) have ‘sort of’ announced a cut back of between 300,000 and 700,000 bpd on crude production starting at the end of November.

Is it a bird? Is it a plane? Of course not! It’s a trial balloon of OPECian proportions!
The current crude oil glut (thanks to a convenient boost in Saudi production that started in August) is 1.2 million bpd. The cuts that were ‘sort of’ announced will not eliminate the glut, but maintain it at a lower level. This assumes that all the members will not only agree, but also agree on how long the duration of the cuts will be – neither of which I believe will happen.


Russia is the world’s largest crude oil producer but missed the meeting. Three OPEC members including Iran, not to mention the ever financially-twitching Venezuela, want or need to increase production to maintain budget commitments; so a cut does not help the matters at home or at the national ATMs.

Why leave the “official” announcement until after the November 30 meeting? Why not now?

The answer will be obvious when you pull up at the pump over the next week to 10 days. This is a Wall Street speculator’s, “I wanna and I’m gonna be a rock star” dream come true!

All the price increases you will see (and there will be many in technicoloured price signs) will be based on guesswork, not on hard inventory or demand numbers, just pure figures of their imaginations.

This is exactly what OPEC wants.

In the next 60 days, the price of crude will bounce around, as will rack and pump prices. Why does OPEC want to cut production? To get a higher price! So now they need to know the floor and ceiling numbers over the next 60 days.

The danger here is that if the traders drive the WTI price to $55/bbl and it sticks, then the highly responsive U.S. shale industry will just reboot with vengeance.

The Saudis will then revert back to plan A, which was, and right now is, to flood the market to maintain or gain market share back and heel North American crude back into the financial ground it came from.

OPEC has underestimated the resilience of the North American oil producer and the diversity of the North American economy. Once the hot air runs out of the trial balloon it will come back to earth with a bump of reality.

Reality bites, it really does! And you can take that to the November OPEC meeting.

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Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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  • Saudi reduction amount to selling a 100 barrels for $50.00 a barrel or selling 50 barrels for $100.00 each.

    When they reduce production, I’ll bet you the cost per barrel will be going up so that they have the amount of incoming dollars for selling 1/2 of what they did in the past.