The OPEC Deal: A Last Gasp of Relevance? – 10/31/16

OPEC may have pushed oil prices above $50 with promises of their first production cut in eight years, but doubts remain about how effective a deal could actually be. Between bulging inventories, internal tensions, and a loss of market share relative to non-OPEC producers, even the largest cuts promised in the range put forth in September look relatively minor, as well as unlikely.

Still, OPEC members have been too shaken up by the price collapse for the group to take no action. And should the group have a repeat of Doha, where the talks collapsed over Iran’s part or lack-thereof in the cuts, the costs to the already battered economies of OPEC could be massive. Failure to finalize the deal could mean a return to prices in the low-$40s, according to Goldman Sachs Group Inc.

Of course, if OPEC does manage to implement the maximum cuts, then they would still need to wait for the record surplus to fall off.

The bloc’s own data show that, under the cuts, the excess held in stockpiles would fall just 11% next year. Should competitors — chiefly Russia and the U.S. — decide to increase production and take advantage of the situation to gain a higher market share, the deal could easily fall apart. Any deal not involving at least Russia would have a superficial impact.

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If OPEC reduces output by 900,000 barrels a day from September levels as agreed in Algiers, inventories would contract as a result; however, even within OPEC, countries are probably going to miss that target. Four OPEC countries claiming exemption from the deal — Libya, Nigeria, Iraq, and Iran — increased output by 450,000 barrels in October alone, according to a Bloomberg News survey of available data. Any increased output from those members would have to be matched by grudging cuts by other. Most extra cuts would probably be coming from Saudi Arabia which faces its own economic troubles and reluctance to sacrifice market share for the sake of a losing battle.

Cutting output by enough to achieve OPEC’s objective also hinges on non-OPEC producers, especially Russia, playing their part. Yet Russian officials have said at most refrain the nation would refrain from further increases, according to Interfax, and Russia has had mixed history when it comes to following through with agreements with OPEC.

Representatives from other major oil countries such as Brazil, Kazakhstan, and Oman are also hesitating to accept or outright denying any responsibility to cut their oil output. Officials from Oman have said the nation is willing to cut production as part of deal, but is waiting for OPEC to reach an internal agreement before deciding on its own cuts. Meanwhile, Brazil has publicly committed itself to boosting output by 290,000 barrels a day next year, the biggest increase of any non-OPEC nation, according to the IEA. Kazakhstan also plans to boost output next year following the restart this month of its Kashagan oil field after 16 years of development.

Should OPEC implement its deal, it will almost certainly mean some increase in oil prices. How much some means will depend heavily on how much stock investors put in the group’s ability to affect markets as it used to. As U.S. shale drillers return, threats to oil demand come in new and old forms, and so many more factors outside of OPEC’s control threaten its relevance, it’s hard to say how much longer markets will focus so intently on what the group does.

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