When Will OPEC's Production Cut End?

Earlier this month, UAE energy minister Suhail Al Mazroue revealed that OPEC has big plans on the horizon. He currently fronts the world's most powerful oil cartel and maintains that the formation of an "OPEC supergroup" could soon materialise.

Currently, OPEC's existing production cut deal is set to expire at the end of 2018. While there is a possibility to renew, Al Mazroue maintains that a new group would aim for longer-term cooperation between OPEC's 14 member countries, as well as allies like Russia, Oman, Mexico, Kazakhstan and other small scale oil producers.

Treading carefully in a volatile market

Together with Saudi energy minister Khalid Al Falih and Russian energy minister Alexander Novak, Al Mazrouei hopes to develop a framework for launching the new cartel. Of course, it would go hand in hand with a unique set of challenges. First, OPEC needs to wrap up the current production cut deal before prices drop. A frantic exit is off the cards, as this would trigger a price crash. OPEC also needs to avoid supporting competing production, especially when it comes to North American shale and Brazilian deepwater.

Competition within its own ranks must be closely guarded, with nations like Iraq unveiling plans for major expansion and therefore non-compliance. Finally, in lieu of numerous environmental factors, the long-term outlook for oil demand is uncertain. Some forecasters expect oil to peak as soon as the 2030s which could see OPEC facing a stagnant market.

Could the IEA trigger an OPEC production boom?

Meanwhile, the International Energy Agency (IEA) is also making waves. It recently welcomed India and China into its ranks, which will both fuel future demand growth. Mexico was also sanctioned as a fulltime member, which creates some conflict with its commitments to OPEC. With these factors in mind, OPEC could choose to drastically ramp up oil production in a bid to cover falling prices, keep members happy and capitalise before oil demand peaks and demand dries up.

Unsurprisingly, Russia will play a key role in determining whether OPEC extends its production cut and if a "supergroup" is formed. The country's oil output is currently equal to the US and Saudi Arabia, which makes it one of the largest producers on the planet. It's also one of the world's biggest gas exporters. As a result, Russia's best interests will have major sway over whether OPEC can garner enough power and market share to extend production cuts or form a second cartel.

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